The world needs alternative asset investment and cryptocurrencies fit the bill

Cryptocurrency has become an insignificant phenomenon in today’s finance world. We observe a lot of institutional investment coming into cryptocurrencies, especially Bitcoin. The world is divided on their views whether it is a good move or not. The results are locked in the future, but we can make an effort to understand the logic behind it. Let’s start with understanding what cryptocurrencies are, and whether or not they fit as an alternate asset class.

Is cryptocurrency currency, a coin or paper?

In our honest opinion we feel he is a misleader.

Cryptocurrencies are not a currency. They are digital assets. We can group them into the intangible asset category according to the classic finance definitions. However, the advantage is that they do not waste assets that depreciate over time or even bulky valuables that require storage and other security costs.

Normal interest costs (opportunity cost for holding any asset), insurance (if someone wants to insure their digital assets from digital theft, etc.) and protective charges may be required to hold these assets. Therefore, cryptocurrencies are digital assets with low maintenance cost and zero depreciation.

What are alternative investments?

Alternative investments are any other non-traditional investment asset class. Traditionally, finance means public equity and corporate and government bonds. Any other asset class, namely private equity, venture capital, real estate, hedge funds, leveraged buyouts, risky debt, land, art, commodities, real estate, structured products and much more can all be called investments Secondly.

Why alternate investments?

Since the great financial crisis of 2007-08, organizations are looking at investments in a big way in a big way and have been making larger allocations to meet their earnings expectations while trying to diversify the risks. It was the traditional investment routes and their low earnings period for a significant period after the crisis that necessitated alternate investments in the portfolio.

Are cryptocurrencies a good alternative investment?

Our research shows that cryptocurrencies have a very low correlation with traditional and alternate asset classes, namely stocks, bonds, real estate, gold, emerging markets. This makes them very good risk diversification and mitigation tools. Various research also shows that it is not the traditional investment price drivers that drive the digital assets that make their inclusion in the portfolio very favorable for the portfolio’s overall risk-reward profile.

Separate studies show that an allocation of only 1%, 2% or 3% of total investment in digital assets improves the portfolio’s long-term excess returns while lowering the Sharpe ratio and significantly improving investment efficiency in terms of return u adjusted for risk on capital. employed.

Institutional investments move into cryptocurrencies

Institutional investors are gradually moving into the cryptocurrency space and Bitcoin seems to be the current investment option.

Given the economic uncertainty triggered by the pandemic locks and the closure of total economic activity worldwide, it appears that alternate investments in digital assets are specifically tailored to provide the risk mitigation and the product production that Bitcoin has displayed.

Some of the reasons why one would consider having cryptocurrencies as an alternative asset class in their portfolio are briefly accounted for by MicroStrategy CEO Mr Michel J Saylor. But I think there are many narratives that are the additional reasons for considering such an allocation. Some of them are:

Bitcoin system can tolerate bug

Hardcoded mathematical algorithms that drive the crypto protocols are non-volatile over time, regime change, pandemic or any such socio-economic disruption.

Bitcoin is a retail-driven phenomenon

Already a widespread phenomenon, it is only a matter of time to adopt Bitcoin as a mainstream asset.

Finished Supply – Unofficial

One of the most important features of Bitcoin and many other cryptocurrencies is that its supply is Limited and deflationary by nature.

An emerging value store

Bitcoin investments are more driven by the “value store” in times of economic uncertainty.

Liquidity

Cryptocurrency transactions are relatively fluid for many other asset classes.

Accessibility

The most lucrative of alternate asset classes, namely, venture capital, private equity, art, real estate and similar such investments focus on processes and restrict certain channels.

By comparison, Bitcoin and cryptocurrencies are open networks, digitally available, global in nature with no geographical and egalitarian constraints in that it does not distinguish the economic status of willing participants.

Low fees

Most other alternative investments come with a huge price tag in the form of Advisory fees or Management fees – cryptocurrencies on the other hand are open protocols with direct access with the cost to trade being the only possible fees involved.

Bitcoin-induced demonization

With more and more governments moving towards CBDCs, we are witnessing a demonization of a category of fiat currencies from physical notes and coins to digital or fixed coins. This phenomenon would in turn help the adoption and proliferation of Bitcoin and other limited supply cryptocurrencies.

All these features make cryptocurrencies a very suitable alternative asset class, but at the same time in India we need policy intervention to regulate this industry by a legitimate financial institution to check any potential illegal activities. Hopefully the industry and all stakeholders can work in this direction.