Blockchain means we’ve already passed ‘peak fund’
The rise and fall of bitcoin is a sideshow to the potential change that lies ahead for the investment industry.
Bitcoin’s price collapse will raise satisfied smiles from sceptics. They can congratulate themselves for being right on the valuations, at least for now.
They are right that overexuberance is a danger; history has made that point many times. But the birth of cryptocurrencies and their unprecedented rise to popularity raises a further point to consider: is the investment industry failing to make the case for traditional investments? Are we missing a trick?
Untested, unregulated and highly volatile
Around 300 million people hold cryptos, industry estimates suggest. In emerging markets, crypto ownership often exceeds equity ownership; accessibility is a crucial factor. These dramatic numbers reflect what we witness in everyday life – the conversations in pubs, on social media or in the back of cabs. A lot of people have been inspired to buy into an untested, unregulated, highly volatile new asset. This has proved disastrous for some, especially for those who bought at the peak.
If crypto and digital assets can sell themselves so well, despite these obvious drawbacks, there are lessons for asset managers. Ironically, it is blockchain, the technology that underpins cryptocurrencies, that could be the catalyst for change for the traditional investment industry. In fact, it is probably the reason we may have already passed “peak fund”; in the decades ahead new types of bespoke investment products could become more common than the unit trusts and open-ended investment companies (OEICs) that dominate today.
Blockchain technology will help provide access to more exciting, more tangible assets. A new breed of asset management firm with broad capabilities will make it simple to invest in the world around us. A shopping centre, for example, could be carved up and slivers of it sold to local investors, perhaps its own shoppers. Ledger technology would record ownership and effectively create a trading platform. Buying and selling is easy and transparent, and the asset is tangible. It could be blended as part of a portfolio to ensure some diversification and to achieve the best outcome for the investor.
Increased demand for disruptive technology
Tangibility is key as is a connection with the underlying investments. The popularity of crowdfunding over a longer period and the demand for disruptive technology stocks during successive lockdowns has shown this. Investors want to know the story of their investments and ensure they match their own values. They want their portfolios to be personal to them. Use of blockchain technology can aid this journey.
The traditional world of investment will also reap the benefit of embedding blockchain technologies. Efficiency of back office operations could be transformed. Transferring asset ownership with a single click is preferable to the current 17-step trading process.
Investors should reap the benefit of this wave of democratisation; assets once out of reach become tokenised and easily accessible and affordable.
The rise of the digital wallet
In the not-too-distant future, investors will likely hold more of their investments in their digital wallet than they do in funds. This could become a reality within my career.
The need for asset managers that active manage investments will grow in this democratised world. The plethora of new investing options will need to be researched to assess their potential and their impact. Portfolios will need to be balanced and structured to meet the goals of their owners.
The question is whether the industry can embrace this challenge. Not every company is ready for the journey and some won’t go the course. Those already bringing together public and private markets on their platforms will be best placed.
The key is to forge strong connections with those already immersed in the world of cryptocurrencies. The crypto industry is at a similar stage to the hedge fund industry 20 or 30 years ago. While it remains unruly, some platforms are attempting to use the extreme volatility to try and offer more predictable returns.
Many, many investors have turned to crypto. Others have chosen to crowdfund companies they believe in. The industry can meet this need for personalisation and broad choice by embracing blockchain, and by being open to the ways in which new asset classes can work in portfolios. If we fail in this aim, even more investors will be lured away to whatever tomorrow’s unorthodox and untested investments might be.
A version of this article originally appeared in the FT on 20 July 2022.
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