[ I N - D E P T H
out risk mitigation are necessary
if cryptocurrencies are to attract
mainstream institutional investors.
Unlike hedge funds, institutional
investors have far greater scrutiny
on an asset with no track record.
And right now there are more
questions than answers.
Private cryptocurrency worries
“The starting point is the question
of whether or not cryptocurren-
cies are actually currencies or
rather an innovative yet highly
speculative new asset class,” says
Martin Hochstein, senior invest-
ment strategist at Allianz Global
Investors. “Against the background
of still extreme price volatility, a
lack of recognition as legal tender
and the sheer number of currently
more than 1,000 different crypto-
currencies, these requirements are
not met.”
Stephen Jen, chief executive of
Eurizon SLJ Capital, says crypto-
currencies do serve a purpose as
media of exchange which could
function to help with the trade of
goods. But they are not currently
relevant as traditional curren-
cies are to represent the value of
goods simply because they are too
volatile.
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B I T C O I N ]
“I am unclear whether these assets will take a big
market share from the traditional monies.”
STEPHEN JEN, CHIEF EXECUTIVE, EURIZON SLJ CAPITAL
“I am unclear whether these
assets will take a big market share
from the traditional monies,” says
Jen. “My hunch, for now, is nega-
tive given their extreme volatility.
They do serve some purpose but
cannot, at this point, replace the
traditional currencies.”
The volatility aspect has been
particularly notable this year. In
November bitcoin lost almost a
third of its value in less than four
days after plans to upgrade the
bitcoin network to improve speed
of transactions—the so-called hard
fork—were abandoned. Ethereum,
the other major cryptocurrency,
which makes up $41 billion of the
market share, saw its price surge
almost 50 times from the start of
the year to June, before falling
back by about a fifth.
The technological issues are
compounded by cyber crime risks
which few institutional investors
understand, let alone have the
ability to combat. Last year, Hong
Kong-based Bitfinex lost more
than $60 million worth of bitcoin
to hackers and was fined by the
US Commodity Futures Trading
Commission ‘for offering illegal
off-exchange financed retail com-
modity transactions in bitcoin and
other cryptocurrencies’.
On top of all this institutional
investors, who favour established
currencies, are dissuaded by the
lack of track record and the pos-
sibility that regulators may curb
these private cryptocurrencies and
introduce their own central bank
currencies.
“Private cryptocurrencies open
the door to the financing of illegal
activities, money laundering
and the circumvention of capital
controls,” says Hochstein. “Ulti-
mately, these could result in a ban
of private cryptocurrencies and
the creation of alternative digital
central bank currencies.”
Whether these are teething prob-
lems or more fundamental issues
remains to be seen.
“Once crypto custody is built and
institutional trading can be done by FIX,
the path in will be much easier.”
LEE SOLOKIN, GLOBAL DIRECTOR, AUTONOMOUS NEXT
Issue 54
TheTradeNews.com
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