What seemed to be a fad for a few digitally savvy speculators 10 years ago has become the world’s fastest-growing asset class, with its paladin, bitcoin, leading the pack.
According to foreign exchange analyst Forex Suggest, bitcoin, ethereum and dai will be in the top 10 of assets by market capitalisation in 2024, with bitcoin’s growth outstripping that of Microsoft, Amazon and Toyota. It is boldly going where standard investments have never gone before.
Such scale means traditionally minded investors can no longer think of cryptocurrency as a speculation or a gamble: it is an asset class, Jim, but just not as we know it.
And if Elon Musk, one of the world’s richest entrepreneurs and innovators, can play around with bitcoin and change the direction of its price, seemingly on a whim, then ordinary investors, too, should be able to class it as part of their overall portfolio.
Advisers have been cautioning clients not to commit swathes of capital to what is still a volatile and uncertain market.
Except they can’t, at least, not in the advised space. While more than 2m Brits own small pieces of crypto in various online wallets, this is not coming with any regulated financial advice.
Quite rightly too: financial advisers, being regulated by the Financial Conduct Authority, do not want to touch unregulated investments or speculative punts, at the risk of being caught out when things go wrong.
Although the FCA and other agencies globally have issued rules and guidelines around the edges of promotions and products relating to crypto, few have gone as far as to allow crypto into the regulated, intermediated financial space as a qualifying retail asset.
Cats, babies and neophobes
Of course, the Dutch and the Canadians got in early, with their regulators allowing crypto-based exchange-traded funds for domestic clients wanting to get their hands on a regulated product that can give them exposure to this emergent asset class without the full risks of direct exposure.
But the Securities and Exchange Commission in the US, along with the FCA and other regulators, have been far more cautious, concerned about the unknown risks of a currency that has no physical presence, cannot be traced easily and which may have helped facilitate money laundering for a crack den somewhere else around the world.
While the SEC recently gave the green light to an unleveraged ETF, it drew the line a few days later to a proposal for a leveraged ETF, which would have added the risk of gearing or borrowing to the risks of the underlying basket of synthetic digital currencies.
That said, some of the fears around crypto and its murky connections to the darkest corners of the dark web may be just that: fears. Fears of the unknown, or neophobia – the fear of new things – is common among humans and other animals. It's a primordial directive.
For example, cats and babies are neophobes. Try to get them to eat something new or introduce a new sound: their reaction is as terror-filled as if you unleashed the demigod Zuul from the fourth pit of hell.
So, too, investors and advisers used to working in a structured, regulated environment, where the structure of the product makes sense and there are years of collated data available, are neophobes.
When it comes to crypto, the fact it has not been around long enough to build up a track record is a big sticking-point for regulators and the regulated.
Without proper authorisation and a framework in place that provides protection for investors in the event of fraud or crypto wallet theft, advisers have been cautioning clients not to commit swathes of capital to what is still a volatile and uncertain market.
That said, there are developments that might make it easier for advisers to provide their clients with exposure to the investment or speculation (whatever you want to call it), such as investment trusts and ETFs that can track the direction of crypto through exposure to synthetics or to companies working in the industry.
It's as if you unleashed the demigod Zuul from the fourth pit of hell.
And with familiarity breeding contentment, the increased knowledge of blockchain – the building blocks for cryptocurrency exchange – and ledger technology is making it easier for banks to allow crypto payments as deposits on houses, and dentists to accept crypto payments.
It is worth putting an aside here on traceability; while it is hard to trace, bitcoin does not make payments anonymous. Blockchain is a public ledger so the address of your crypto wallet is visible to everyone.
This means it can provide more certainty as to the origin of money than, for example, cash that suddenly arrives in a bank account. On the other hand, it can also mean hackers are able to find and hack into your wallet.
But just as in the fiat currency world, where scammers and fraudsters prowl and banks work hard to protect customers from theft, so, too, steps are being taken in the cryptocurrency world to protect and secure clients’ virtual money.
And with the rise of ETFs – a regulated investment – starting to offer investors a way to track a basket of synthetic cryptocurrencies without the risks of direct exposure, it will not be long before the FCA starts to allow these or similar products to be promoted to UK retail investors.
After all, if fund managers such as digital currency asset manager Grayscale Investments can launch five new digital currency investment trusts for accredited investors, why shouldn't ordinary investors soon be able to get their hands on a retail-friendly, FCA-regulated version?
Whether they should, is another question – but again, would it be better for you to advise your clients either way, or leave them to make their decisions alone?
Simoney Kyriakou is senior editor at FTAdviser