Is bitcoin a legitimate asset class? - TechCentral

Is bitcoin a legitimate asset class?

Eye-watering returns, surging prices and market capitalisations to rival some of the world’s largest companies make cryptocurrencies hard to ignore.

Bitcoin, the original and arguably most well known cryptocurrency, continues to skyrocket. Its price more than doubled from US$1 348 on 1 May to hit a record high just over $2 766 on 25 May. Three days later, it lost nearly 20% of its value, data from Coindesk shows.

Market watchers warn that the meteoric rise in bitcoin’s price has the makings of a bubble. However, financial technology experts say we’re witnessing the emergence of the asset class of the future. Data from Coinmarketcap shows that bitcoin spurred 839 other cryptocurrencies and assets, with a market cap of over $73bn, since it was first introduced in January 2009.

A white paper by ARK Invest and Coinbase, which evaluates bitcoin in terms of asset class theory pioneer Robert Greer’s four characteristics that delineate asset classes, found that the cryptocurrency can in fact be considered an asset class.

“Bitcoin exhibits characteristics of a unique asset class — meeting the bar of investability, and differing substantially from other assets in terms of its politico-economic profile, price independence, and risk-reward characteristics,” the analysts wrote.

A financial service provider is not allowed to render financial services in respect of a product that qualifies as a financial product and where that product is not lawfully issued by a product supplier

According to Farzam Ehsani, blockchain lead at the FirstRand Group, cryptocurrencies are “a new asset class in their own right” as they don’t fit into traditional asset classes such as cash, bonds, equities, commodities, real estate and the like. He said the factors that differentiate non-government backed cryptocurrencies include the fact that they are not issued by central authorities or legal entities, and that the amount of tokens in existence is mathematically determined and cannot be altered by any such authority.

He went on to add that cryptocurrencies offer investors an opportunity to diversify their portfolios in that they would be uncorrelated to the rest of the portfolio and would thus optimise expected returns for certain risk levels.

“Cryptocurrencies today are the ideal asset to add to investment portfolios, yet few people realise this. As an example, a study was done to find the correlation coefficient of 1 400 exchange-traded funds (ETFs) versus bitcoin. The study found that well over 95% of these ETFs, representing different asset classes, had a correlation coefficient of between -0,1 and +0,1 against bitcoin. This is a tremendous opportunity for investment portfolios.”

But South African laws do not allow registered financial services providers to invest in cryptocurrencies on behalf of their clients.

The Financial Advisory and Intermediary Services (Fais) Act does not prohibit an authorised financial services provider from rendering services on behalf of clients in respect of a product that does not qualify as a financial product as defined in section 1(1) of the Fais Act.

However, as Caroline da Silva, deputy executive officer of Fais at the Financial Services Board, explains: “A financial service provider is not allowed to render financial services in respect of a product that qualifies as a financial product and where that product is not lawfully issued by a product supplier.”

Francisco Khoza, head of banking and finance at law firm Bowmans, says certain loopholes in the laws would allow for legitimate investment into cryptocurrencies and give consumers recourse against poor investment decisions by financial services providers.

“The bottom line is that you could structure some financial products reference some cryptocurrency product or a blockchain-derived product, and they will have to look at it. If a court were to look at it they would not say ‘I’m dealing with bitcoin’, they will say ‘I’m dealing with a derivative’ — and a derivative falls under the purview of the Financial Services Board to regulate,” he says, referencing the definition of derivatives in the Financial Market Act.

Khoza also points to the “other” category in Regulation 28 of the Pension Fund Act, which would allow trustees to invest in bitcoin provided they understand the nature of the asset, exercised their fiduciary responsibilities, used their skills and received advice over and above their skills.

For individuals trying to pick a cryptocurrency to suit their investment needs, Ehsani says he likes to evaluate cryptocurrencies in terms of the characteristics of money: divisibility, durability, fungibility, portability, scarcity and acceptability. “Most cryptocurrencies beat most other asset classes in the first five categories, but as the asset class is nascent, acceptability lags behind other asset classes at the moment. But it’s important to note that over the long term, acceptability is a function of the first five characteristics and therefore cryptocurrencies have a bright future.”

  • This article was originally published on Moneyweb and is used here with permission

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