The financial industry is going through an interesting time when it comes to alternative currencies. You can’t avoid seeing headlines about cryptocurrencies anymore. Probably the most known cryptocurrency, Bitcoin, hits its all-time high day after day measured in USD. Seems like the hype is here and everyone is writing about it – so are we.
What is this Bitcoin then? Bitcoin along with the other cryptocurrencies is a digital currency without an issuing central bank. It is a totally decentralised system, using peer-to-peer blockchain technology. These peers are called miners who are giving their CPU power in exchange for the currency itself based on the blockchain algorithm. The algorithms depend on which cryptocurrency is in use, and hence gives each cryptocurrency slightly varying features e.g. time of a single transaction.
Cryptocurrencies are expanding heavily within all aspects of life and they are being accepted in an increasing number of markets. Therefore, they are starting to fulfil the liquidity demands of the market. Making them into generally accepted currencies. However, cryptocurrencies are highly controversial and unstable which is causing volatility to their value. They are also poorly correlating with other currencies, so it is challenging to hedge though there are few issuers nowadays offering derivatives for balancing the exposure.
Another disadvantage with cryptocurrencies is that they can’t be stored in normal banks. The currency is accessed by a token which is saved in electronic format, but not registered anywhere. Therefore, the ownership of the currency is defined by the holder of the token, which exposes the currency to hardware errors and theft. Usually, cryptocurrencies are recommended to be stored in a secure location which is isolated from the internet for that particular reason. Thus, there are still features that are hindering cryptocurrency’s rush to replace traditional currencies.
Still, cryptocurrencies are a risky way to diversify a traditional allocation of a portfolio. In FA, cryptocurrencies can be added as an own asset class and printed out in allocation reports and so on. That way the performance contribution and the risks of cryptocurrencies can be tracked as a separate unit from the traditional methods of investing. For us, cryptocurrencies are just a matter of configuration.
If you wish to learn more on how FA can help you in analysing and tracking cryptocurrencies as a part of your portfolio, just leave your email address below and we will be in touch.