Cryptocurrencies – speculative tool or store of value?

Peak cryptocurrency occurred to me during my summer holiday with my extended family. My 18-year old daughter bounded up to me and asked if she should invest in cryptocurrencies. One of my nephews had just revealed to her that he had made several thousand pounds in a couple of weeks by investing in a new cryptocurrency. What’s more, he had missed out on significant gains by cashing in when he did. I calmly advised her against it, pointing out that without researching the market and knowing what she was doing, she would effectively just be gambling. With my money.

It doesn’t help that Kim Kardashian decided to promote something called Ethereum Max to her 250 million Instagram followers in what Charles Randell, chair of the Financial Conduct Authority, has called probably “the financial promotion with the single biggest audience reach in history.” What’s more Ethereum Max — not to be confused with the more mainstream Ethereum — is a speculative digital token created a month ago by unknown developers, something she didn’t have to disclose.

In mid-July 2021, the FCA created an £11 million fund to run an online marketing campaign warning , retail investors, especially 18–30-year-olds, about the risks associated with many crypto investments.

Around 2.3 million U.K. citizens currently hold cryptocurrencies, 14% of whom have used credit to purchase it. Moreover, 12% of UK holders — roughly 250,000 — mistakenly believe they will be protected by the FCA or the Financial Services Compensation Scheme should things go wrong, according to the FCA’s research.

Randell nevertheless remains wary of overstepping the mark when it comes to the new asset class, emphasizing that UK consumers are free to engage in other unregulated speculative activities — from gold and foreign currencies to Pokemon cards — despite there being “no shortage of consumer harm in many of those markets”.

His detractors compare cryptocurrencies to tech stocks in terms of volatility, emphasising the potential long-term gains, but this applies more to younger companies than the established tech giants. Investors should also remember the tech crash at the turn of the century when many overvalued stocks ended up being worth zero.

But at the same time, institutional money is pouring into the crypto market, legitimising it and demonstrating that there are market participants that believe in its future as a potential asset class.

Some see allocating to bitcoin as a portfolio diversification strategy. Family offices, hedge funds, and traditional money managers are changing their minds on their previous perspective on cryptocurrencies as a haven for criminals and the financially illiterate. An eye-watering $17 billion of institutional capital has flooded into the space this year alone.

What’s more a recent study conducted by Fidelity Digital Assets found that seven in ten institutional investors expect to buy or invest in cryptoassets in the near future. More than half of the 1,100 respondents surveyed between December and April revealed that they already own such investments.

So where does the truth lie? Are cryptocurrencies a ‘get rich quick’ scheme or an emerging asset class with underlying fundamentals that will allow investors to make informed decisions on their trajectory? On the available evidence, both might be true. As the market evolves, more products are emerging that allow retail investors to spread their risk and more established cryptocurrencies such as Bitcoin are gaining respectability. Watch this space.

Written by: Alexander Clelland, Director at Houston.