It's not often that an investment can be compared to both safe bonds and swampy standards and risky venture capital holdings. But that is currently happening with certain crypto asset schemes, as new developments in digital finance continue to bend the old definitions.
With investors investing billions of dollars in new Bitcoin tracking ETFs in the US, the debate over what purpose, if any, cryptocurrencies can serve within portfolios is changing.
Many investors have compared Bitcoin, the largest cryptocurrency, to "digital gold," which they believe can serve as a defensive asset against inflation and a counterweight to other risks.
However, some investors wonder if certain crypto-based strategies could provide an alternative to holding bonds as a source of fixed income streams. And it's becoming an area of growing interest with bond yields stagnant at low levels and the amount of negative yield debt, worldwide, near all-time highs.
Right now, there are a number of ways investors can seek passive returns through the crypto markets.
First, it is possible to lend money to other parties on centralized and decentralized crypto platforms, and earn competitive interest rates. For example, SEBA, the Swiss regulated crypto investment bank launched by a pair of former UBS employees, has launched a service that allows its clients to earn interest from decentralized finance (DeFi) and crypto loans, with returns ranging from 3 to 13 percent.
"We've had increasing demand from institutional customers for the performance product," said Guido Buehler, SEBA CEO.
Similarly, the volume of smart contract loans transacted on the ethereum blockchain increased from $ 3 billion to more than $ 26 billion, according to data from research provider CryptoCompare.
Second, income returns can be generated from the "gamble": locking your crypto assets to contribute to the management of the blockchain on which transactions are recorded, earning crypto rewards in return.
Analysts at Goldman Sachs have compared the "equity return" paid by some blockchains to the dividends paid by stocks. They also said that the returns offered by DeFi services likely contributed to their growth in the last year. Figures from CryptoCompare show that the volume of stake in the ethereum blockchain increased from $ 65 million in January to $ 4 billion in October.
During the same period, the value of stablecoins (cryptocurrencies backed by conventional currency holdings) that were promised in exchange for returns jumped from $ 2 billion to $ 19 billion. Max Boonen, CEO of one of the largest cryptocurrency trading firms, B2C2, even thinks "Crypto Bonds" that are paid out in stablecoins are imminent.
But this surge in return-generating crypto investments has drawn intense scrutiny from groups offering products to the public. Coinbase, the US-listed cryptocurrency exchange, abandoned an effort to launch a performance offering called "Earn" last month, after the US Securities and Exchange Commission. threat of legal action if I went ahead.
Many US regulators are of the view that an offering of products to pay interest on crypto deposits to the public is technically a guarantee. Therefore, providers must comply with financial rules on issuing securities, such as the requirement to register with authorities.
Several companies that have already started offering these interest-bearing accounts are now being pursued by state regulators. New York Attorney General Letitia James ordered two unnamed crypto-lending platforms last month to stop operating in the state. Authorities in several other states have also said that lenders BlockFi and Celsius violated their securities laws. Both companies have denied these claims.
3% -13%
Interest rates offered by decentralized finance and crypto loans
However, crypto performance offerings aimed at institutional money managers and professional investors are not subject to the same regulatory restrictions as products aimed at the public.
Still, experts say investors should be very cautious about drawing parallels with conventional fixed income investments, given the extreme volatility of cryptocurrencies, their relative lack of regulation, and the risks associated with backing up investment projects. early stage cryptography.
"Frequent protocol errors and piracy losses are typical characteristics of the new technology and reflect the immaturity of the [DeFi] industry, ”Goldman Sachs warned.
Buehler at SEBA Bank uses a different analogy to explain crypto performance products to potential investors. "It is offering a similar opportunity for certain cryptocurrencies that we have seen perhaps 25 years ago for the real estate sector," he argues. "You buy an asset that has significant upside potential while generating a significant return."
However, some investors take a more cautious view. Peter Edwards, CEO of the Australian family office Victor Smorgon Group, which has started shifting a small percentage of its assets to cryptocurrencies, sees Bitcoin as an alternative to gold, but sees all other cryptocurrency opportunities as riskier.
"Everything else called currency, [we] consider it basically venture capital, ”he says, comparing the projects to unproven start-ups whose value is based on their potential for future profitability.
But Edwards admits that the returns DeFi offers are attractive. "When researching the DeFi space, I was amazed at the returns that could be achieved with certain hedging policies that limited their risk," he says. "[A] The 6.5% return is huge today. "
The lack of attractive returns elsewhere has undermined the conventional strategy of holding 40 per cent of a portfolio in bonds and has only increased the attractiveness of cryptocurrencies, according to Ruffer, the UK wealth manager who made $ 1 billion investing in Bitcoin.
As Duncan MacInnes, an investment director at Ruffer who helped manage his Bitcoin holding, explained earlier this year: “The rise in the price of bitcoin has been quite rational in the sense that investors are having to take action. increasingly drastic to hedge against inflation and numbers. know what to do with the 40 percent of your portfolio that is not earning anything. "
