AN increasing number of digital assets have entered the mainstream following the Covid-19 pandemic, which has yet to run its course. Young investors, seeing the spike in cryptocurrency prices, are ditching traditional asset classes and turning to crypto-related investments.
Notwithstanding the chorus of naysayers who claim that cryptocurrencies lack intrinsic value, the new form of currency has certainly become part of the financial ecosystem.
Investors hedging against inflation even propelled Bitcoin to a record high of almost US$69,000 (RM288,087) last November, outperforming traditional hedging instruments such as gold by a mile. Ethereum, the second-largest cryptocurrency by market value, also skyrocketed to a high of US$4,800 from US$500 a year ago.
Even after the recent sell-off, the total market capitalisation of cryptocurrencies was an impressive US$2.15 trillion as at last Thursday, although it was lower than the US$3 trillion recorded last November, according to crypto price and data aggregator CoinGecko.
News that the US Federal Reserve’s tapering of its bond purchases could happen sooner than expected has put riskier assets under selling pressure, with Bitcoin falling to about US$40,000 — the lowest since last September. It was a 40% decline from its November high and about a tenth lower than the beginning of the year
Tightening monetary policy has threatened to reduce the market liquidity that had lifted financial assets. Is the market in danger of a bubble that’s about to burst?
“In the past week, we have witnessed a less than favourable momentum as broader macroeconomic uncertainty impacted the cryptocurrency market. As a traditionally high-risk asset, Bitcoin tends to not perform well in periods of contractionary monetary policy, such as signs of the Fed initiating more hawkish economic policies,” Luno Malaysia’s country manager Aaron Tang tells The Edge.
However, he believes that as widespread adoption continues, it will eventually create a less volatile market, which is a positive sign for those looking to invest for the long term. “In addition, as more investors enter the market, more liquidity will be created, hence we expect less volatility,” he says.
Because of the economic impact caused by Covid-19, certain cryptocurrencies have been adopted as a hedge against pervasive currency devaluation, says Tang. For example, Bitcoin’s fixed supply of 21 million coins makes it a good inflation hedge as its price could potentially appreciate over time as demand goes up.
“Bitcoin price is determined by supply and demand, especially in the short term. This demand is driven by people who understand how the cryptocurrency could benefit the world and believe it will be more widely adopted in the future. What should be remembered is that Bitcoin is still a young technology with a lot of potential for the future,” he adds.
Tang notes that institutional investors have generally become more receptive to the idea of incorporating digital assets such as Bitcoin into their investment portfolios. Moreover, the interest and support of well-established companies such as MicroStrategy, Tesla and Square have increased Bitcoin’s status as a store of value.
“In addition, the belief shown by these institutions suggests that the industry as a whole is maturing. CEOs have concluded that the regulatory framework they need is now strong enough for their companies to get involved,” he says.
Bitcoin is no longer a fringe case, says Tang, and CEOs and companies that have put their money in Bitcoin will pave the way for other institutions and high-net-worth individuals to invest their liquid assets in cryptocurrencies.
Meanwhile, the crypto market has seen positive demand from retail investors, says Tang, as seen by the more than RM16 billion worth of cryptocurrencies traded in Malaysia between August 2020 and September 2021, according to the Securities Commission Malaysia (SC).
“In 2022, we believe these numbers will continue to grow as cryptocurrencies become an established asset class. Furthermore, our survey on understanding the financial management habits of Malaysians involving more than 1,000 adults in the country shows that 62% of investors would consider investing in alternative assets like cryptocurrencies as a way to diversify their portfolios,” he says.
“Meanwhile, 37% noted that utilising cryptocurrencies for long-term investment purposes was an exciting feature of the digital asset. And 40% would use cryptocurrencies as an alternative store of value.”
Yusho Liu, co-founder and CEO of Singapore-based Coinhako, points out that with the recent developments in the cryptocurrency space, people are starting to realise that cryptocurrency is here to stay, as evidenced by the surge in institutional interest.
“Traditional finance institutions are putting funds in crypto while venture capital investments in the crypto space have surged after Facebook’s push to the metaverse. Even Tesla has deployed balance sheet money […]
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