Crypto and the stock market – it’s a wild ride

Widespread adoption is necessary to be considered a long-term success and cryptocurrency isn’t there yet. But it’s moving in that direction.

Cryptocurrencies – be they Bitcoin, Ethereum, Litecoin or Cardano – come with undeniable advantages of portability, divisibility, inflation resistance, and transparency. They, and the blockchain industry that integrates them, are undoubtedly growing stronger.

The essential financial infrastructure is being built and investors now have the ability to access institutional-grade custody services. More companies are investing in the cryptocurrency sector, facilitated through credible financial platforms such as Square and PayPal, which are making it easier to buy and sell cryptocurrency on their popular platforms. But all this comes with a big but. Cryptocurrencies have suffered public humiliation of late.

The price of Bitcoin has plummeted nearly 50% since April, Ethereum has falllen by around 53% since May, and Dogecoin has sunk to near to 60%. The reason? First, Chinese regulators announced that they were banning banks and payment firms from using cryptocurrencies and second, Tesla founder, Elon Musk, suspended plans to let customers pay in bitcoin. The positive of this is that volatility is nothing new for cryptocurrencies. Bitcoin made significant gains at the start of 2021 and hit all-time highs of more than $64,000 per unit. In the past, it has lost over 80% of its value on several occasions.

But, up to now, it has always bounced back. And investor interest remains unabated. PWC reports that the total assets under management (AuM) of crypto hedge funds globally increased to nearly US$3.8 billion in 2020 from US$2 billion the previous year. Its figures also show that the median crypto hedge fund returned +128% in 2020 (vs+30% in 2019). This appetite for cryptocurrencies is confirmed by a report produced by the Alternative Investment Management Association (AIMA) in May 2021. Its research shows that just under half of traditional hedge fund managers are investing or considering investing in cryptocurrencies.

The Financial Times also reports that global hedge funds plan to significantly increase their exposure to crypto by 2026 and to hold an average of 7.2% of their assets in cryptocurrencies in five years’ time. Others though remain cautious. Hurdles to investment in this asset class that hedge funds gave as reasons for not yet taking part were regulatory uncertainty, lack of infrastructure, and client risk/reputational risk.

Regulatory change is afoot however. The Basel Committee on Banking Supervision is stepping up its plans to regulate this fast-emerging market and has said they should “carry the toughest bank capital rules of any asset”. But with big names such as American multinational independent investment bank, Cowen (partnering with digital asset blockchain technology provider PolySign to provide its institutional clients access to cryptocurrencies), and US investment bank Goldman Sachs (backing a Series A $28 million funding round for blockchain infrastructure firm Blockdaemon and investing $5 million in the blockchain infrastructure firm), it is clear that hedge funds expect digital assets to continue to grow and mature as an asset class. And the recent crypto downturn? It’s just part of the wild ride …

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