Is time ripe for cryptos in your portfolio?
I've used this space to express my views about crypto currencies and almost all articles happened during the heady days of 2017 when there was euphoria among the investors and traders alike to take a plunge in crypto investments or trading. The Fear Of Missing Out (FOMO) drove the price then to newer records till the reversion to mean happened by the end of the year. I've settled on how it could be used and what should be the approach (personally I've accepted to trade instead of investing) as I couldn't put it either in an income-generating 'asset' or ascribe to a precious commodity as it can't be a raw material for a finished good, etc.
We're at the fag-end of a tumultuous year where almost all have experienced hardships of some kind, primarily due to the pandemic disruption and the subsequent consequences.
Now, there seems to be an end of the tunnel with unknown repercussions into the future as some excesses were done to avert some other extreme events, only time would tell that. The crypto mania is back again though unlike the last time, 'it's different this time', a cliched phrase most used in describing about markets. So, what has changed in the last three years that needs our attention, or does it? The global central banks and governments have upended their own inhibitions to infuse loads of liquidity in a bid to prevent a larger economic collapse. The initial response to a free fall in all assets in the first quarter of this year was by inundating loads of capital to people, enterprises directly and further stimulus by reducing the interest rates while assuring accommodative posture into the near future by the central banks.
This has resulted initially in the recovery of prices and then led to a boom in the asset prices irrespective of their risk profiles. As the year ended, the rally in the riskier assets seems to have gone divergent to the actual reality experienced across the global economy. This was one of the primary reasons for the conceptualisation of the crypto as currency in the post-GFC (Great Financial Crisis) world of '08. The revisit of these conditions and with an aggressive stance has turned into a pivot for the rally in the crypto prices. Bitcoin, the pioneer among this, has risen to create record highs but devoid of the euphoria or enigma experienced in the earlier bull rally of '17. The anticipation of the excess liquidity in the system to cause inflation is pushing some of the investors, including the institutions, to seek crypto currency as a hedge,a few even replacing the otherwise safer heaven yellow metal, Gold.
Another possible big proponent of the current situation is the augmented institutional acceptance and presence in the cryptos. The introduction of derivatives by CME Bitcoin Future market has allowed both sides of the trade to make it more authentic and the demand for regulated exposure through established channels, has played out in its favour. This is further fueled by the interest of the central banks in the slightly modified form of a digital currency. Though, any formulation of central bank backed digital twins could dent the existing players, the very intent of the regulated bodies into this architecture has added fire to the appetite among the investors.
Also, the soft launch of digital currency by the Chinese central bank and incentivising the initial users has evinced further interest among all kinds of investors. Of course, the limited supply and pre-fixed availability of 21mn BTC (unlike the fiat currency) is perceived as the perfect inflation hedge. Interestingly, this time as the rally picked the prices up, there were no rush of the Initial Coin Offerings (ICO) like that of the '17, where the bubble was reflected in the successful launch of dogecoin (a joke currency and internet meme). Like the extremes of dot com boom guided for the transformation of the internet/technology industry, the '17 boom of cryptos has helped the evolution of this industry.
How much of my perspective towards cryptos has changed? I continue to maintain that if one is not mining (the process of extracting a coin, an economic equivalent of crypto unit) the basic premise of anonymity is lost. So, my constant crib of anyone interested to invest/trade in crypto other than those of mined is that it becomes like any other asset trade thus bringing the tax angle into the equation. But mining has now become expensive especially in the popular crypto options and thus becomes not an ideal proposition to consider.
As the convergence of newer technologies like 5G, quantum computing and AI, blockchain could play its role whether it buffers the excising system or creates an entirely novel architecture needs to be seen. In investing, being flexible, being open to new ideas is a necessary and so my change of heart is an evidence. Certainly, the ecosystem has evolved, consolidated to mature that enhances the experience to have an exposure like those of gold, warming up to this idea is not bad at all.
(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at email@example.com)