A seismic shift in perception

Christopher Bendiksen, CoinShares

The world of cryptocurrencies has experienced a sea change in the past year. Although the nature of bitcoin itself is immutable, which is actually part of its attraction as an investment, the sentiment towards these assets has been shifting quite dramatically.

“The change in tone we observed over the course of 2020 as well as the difference in reception is unlike anything I’ve seen before. Many investors who were previously either dismissive or negative, have either completely changed their tune or at the very least, they want to hear more about how it works,” outlines Christopher Bendiksen (pictured), head of research, CoinShares.

Asset managers like CoinShares have played a significant role in making this transition happen. James Butterfill, Investment Strategist, explains: “Until March and April last year, Bitcoin was still, largely, a speculative asset. Part of that was because a lack of understanding of what Bitcoin actually is.

“A big part of our job has been to re-educate clients and help them understand how Bitcoin can fit in a portfolio. We have been conducting research and talking to investors about the fact that it is its own asset class.”

The path from initial interest to eventual investment takes investors on a journey, an essential part of which is this understanding and knowledge. 

One of the concerns investors often put forward when considering a Bitcoin allocation is its volatility. Butterfill comments: “Its fair for people to comment on the volatility in the Bitcoin market, but we try to help them frame this market movement in the right context. Bitcoin is still a very young asset class, being only 12 years old. Investors need to consider it as they would a small cap company which isn’t yet delivering any earnings. If they have faith in the concept and believe the management will deliver on that concept, then investors have the potential to be more tolerant of a certain level of volatility.”

Bendiksen remarks: “We really need to stress how early we are in the development of this asset. Interacting directly with blockchain technology can be terrifying given it’s a completely unforgiving system. This is why having a product which has custody built into it and takes care of everything within it holds a certain allure.”

CoinShares offers a variety of ways to access Bitcoin and other digital assets, including exchange traded products, indexed and active strategies.

As investors consider Bitcoin more as a store of value, rather than a gamble, the aforementioned volatility is likely to decline. Given some see the role of Bitcoin as an alternative to gold, acting as a safe haven asset within portfolios, Butterfill draws parallels between the cryptocurrency and gold: “Gold is now an established store of value but in the early 1980s, it had 60 per cent annualised volatility. This was a time when there was no algorithmic trading or no high frequency trading to exacerbate volatility. As the gold market has matured as a store of value, so has its volatility declined.” 

It is therefore reasonable to theorise that Bitcoin may follow a similar trajectory. 

Societal innovation

The need for an inflation hedge within portfolios is driven by the current economic environment. Butterfill says: “Negative interest rates are one of the triggers for the growing appeal of Bitcoin in the developed world. Some banks have said they would start charging negative interest rates on lower tier bank accounts. If a much greater proportion of the public are being charged negative interest rates, the nature and value of cash will continue to erode, caused by quantitative easing. This will cause investors to feel they need an anchor for their assets and something like Bitcoin, which has a fixed supply, would work well.”

Bendiksen also observes the impact of the Covid pandemic: “It was a bit of a reality check for everyone. The unprecedented expansion of the money supply we’ve seen in the wake of the pandemic is causing people to worry. It’s not only negative yields causing concern, but also the prospects of rising inflation when different countries come out of lockdown.”

He says Bitcoin represents an important societal innovation: “Separating money and state is a very important thing we need to do this century. Bitcoin presents a credible alternative; a voluntary alternative that exists outside of the system of coercion. It gives society another check and balance on the power of government.”

Bendiksen adds there is evidence of this shift in countries with authoritarian regimes or which have had large currency devaluations: “Countries like Turkey and Cambodia have seen rising volumes of Bitcoin. It’s also safer and easier for people fleeing their country of origin to carry a USB stick in their pocket than large amounts of cash.”

Positive regulatory steps

Butterfill outlines: “For the most part, the steps regulators are taking are quite positive ones. Europe has established MICA, the regulatory framework for cryptocurrencies. Its a step in the right direction that they’re not banning Bitcoin or crypto outright. They’re saying, Okay, let’s regulate this and make sure its safer for investors to buy into. We’re seeing similar steps being taken in the United States too. So that’s quite encouraging.”

He warns that Bitcoin prices are still very sensitive to regulatory issues. He gives the example of Janet Yellen making a remark about potential criminal use of cryptocurrencies, a remark which in turn had an impact on the price.

However, given the demand for Bitcoin is significant, it makes sense for regulators to be encouraging. Butterfill notes: “Bitcoin funds witnessed USD6.7 billion in net new assets in 2020, so the demand is there. If you try to deny people something they really want in their portfolio, if it’s not in a standard regulatory framework, they are going to look for more nefarious areas to invest. And that worries me.” 

Christopher Bendiksen
Head of Research, CoinShares

As Head of Research Chris Bendiksen oversees the firm’s research efforts and provides internal and external guidance on developments in the crypto industry. Prior to joining CoinShares in 2017, Christopher worked in energy shipping where he analysed global energy markets and international flows of liquefied natural gas. Since 2019, he has given guest lectures for London Business School’s Blockchain Series on the topics of Bitcoin Building Blocks and System Architecture. 

James Butterfill
Investment Strategist, CoinShares

James Butterfill has over 18 years of experience in fund management, investment banking, economics and asset allocation gained most recently as an Investment Strategist at CoinShares. Previously James acted as Head of Research at ETF Securities with prior experience as a multi-asset fund manager and investment strategist at Coutts & Co, HSBC & ING Barings.

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