Digital assets are slowly but surely carving out a place for themselves in the modern portfolio. But just how indispensable are they?
“Crypto currencies are here to stay.” – That is what Christopher Giancarlo, Chairman of the U.S. Commodity Futures Trading Commission had to say in 2018. There are over a dozen crypto currencies with market caps exceeding a billion dollars. But more than the market capitalization, it is the potential for real world applications that makes these digital assets valuable and exciting.
Digital businesses and even physical stores have been accepting crypto currencies like Bitcoin and Litecoin as a form of payment for a while now. Crypto wallets provide users with security and ease of use which is further driving up adoption, while Ethereum, Ripple etc. are showcasing the full technological potential of these innovations in mainstream business and finance.
The most cited argument against these crypto currencies is the high volatility exhibited in the market. But that is par for the course for an entirely new asset class that is innovating fairly quickly with regulators and traders just playing catch up for the most part. Given this volatility, do these digital assets deserve a place in modern wealth management? What should drive the allocations towards digital assets in a portfolio? And most importantly – is getting involved in crypto asset management worth it?
The market for digital currencies
In order to answer most of these questions, it is important to look at why exactly the market and the broader world of business is interested in these assets in the first place. At their core, crypto currencies serve as a store of value and provide an alternative method of engaging in transactions which are traditionally handled by state-issued currencies. Crypto currencies are the fully digital cousins of these fiat currencies and are designed from the ground up to integrate seamlessly with the digital economy.
For example, the ability to transact globally without any barriers or costs would be invaluable to the modern economy. Right now, this is a costly and time-consuming process with multiple currency exchanges and the risk of exchange rate movements in the future affecting import costs etc. The fact that crypto currencies solve a lot of these problems is what is driving their adoption in the retail as well as institutional space. This itself makes them valuable to businesses and thus worthy of a spot in any portfolio.
Diversification and growth
Risk management and diversification is essential for any portfolio. Wealth managers have to ensure that client portfolios are well diversified and protected from any shocks. At the same time, it is also important to deliver in terms of asset growth. Digital assets still have small market capitalizations compared to the massive debt and equity markets, but they have significant volatility, which appears uncorrelated to most traditional asset classes. In this sense, they are closer to the alternative investment market in terms of the potential for high risk, high reward opportunities that they present - they could also provide significant portfolio diversification benefits as well.
Closing thoughts - giving clients what they want
A 2018 survey revealed that more than 70% of the millionaires below the age of 40 believed that it was important for them to receive information on cryptocurrencies from their primary wealth managers. Of those aged over 60, this number was only 13%.
What these numbers reveal is the unmistakable trend where certain demographics are becoming keenly interested in digital assets and crypto currencies. The same survey also revealed that about 88% of these millionaires would be happy to receive this information from BigTech companies like Google. This further showcases the need for traditional wealth management firms and private banks to re-focus and re-brand themselves to deliver what their clients are asking for or risk losing out to FinTech or BigTech competitors.
Written by Mark Shields
Mark has over 20 year's of experience working with financial technology across the banking, asset management and capital market sectors. He regular writes content for Avaloq's global community of banks and wealth managers, covering technology trends and innovations, to provide insight and provoke new ideas.
This whitepaper explores the opportunities and challenges for banks and wealth managers of entering the crypto assets market.
How integrating crypto assets can help you overcome several challenges
How you can offer a secure and convenient way for your clients to unify their traditional and crypto assets in one place
How you can prepare for future trends in this market space
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