Sensationalism has long been associated with the digital assets industry, with many headlines painting crypto investing as something of a feast or famine proposition. In this context, it can be difficult even for experienced investors to navigate the noise and operate with a degree of clarity.
However, recent market events have given investors a rare moment to pause, step back and reflect on what really are the fundamental barriers behind the growth of digital assets investing – is it volatility? Unbridled risk-taking? The lack of regulation and institutional approval? Or just plain ignorance? In the newest frontier and Wild West of the financial system, it might be a combination of all the above.
No Risk, No Reward
While many have decried it, the inherent volatility of digital assets isn’t necessarily a bad thing. For one, seasoned investors know that if there is no risk, there is no reward, and beta is usually a vital factor in determining alpha. In the eyes of experienced and experimental investors alike, volatility is not a cause for concern, but consideration. They are attracted to crypto’s potential for higher yields, compared to traditional financial markets.
This is the reason why established names from Bank of America to Goldman Sachs have been offering crypto exposure to their investors. There is undoubtedly a lot of interest in digital assets and this wave can be used to further accelerate the adoption of crypto.
Particularly, investor interest is always higher after major market failures and may be because sophisticated investors know where to look for value and “buy the dip”, with negative public sentiment doing very little to dampen appetite. A recent survey by Matrixport has shown that mass affluent individuals (with over USD 500,000 in investable assets) were twice as likely to be interested in investing in digital assets after the Terra/Luna crash, compared to before. This may be because, in the words of Warren Buffet, investors should be fearful when others are greedy and greedy when others are fearful. This conventional wisdom applies equally to the cryptoverse.
More than a third of investors surveyed by Matrixport also say they operate purely on a speculative basis – mainly because more than half of respondents believe that digital assets offer better returns than traditional assets, with 46 per cent saying they would continue to hold digital assets even if they lose money.
However, if perceptions of crypto as a purely speculative play persist, then this will harm the long-term development of this financial asset. Investor interest in digital assets is unfortunately still partly driven by hype and short-term goals – which can be a highly profitable venture for some but a fool’s game for others.
A Maturing Industry
While digital assets are undoubtedly suffering from a crisis of confidence currently, it’s really nothing too unique in the wider history of financial instruments. Many others have undergone or are still undergoing their own trials by fire, before becoming widely accepted as part of our global financial system.
Take hedge funds for instance, which are said to be first conceived in 1949. They were the financial market’s solution to legitimise shaky investment strategies, with their name actually being derived from the phrase “to hedge a bet”, which means to limit risk. Today, Wall Street speculators have also utilised various tools (including more recently, put/call options) to turn large American companies into little more than poker chips for brokers to make money off a series of bets rather than long-term value investing.
Therefore, perhaps the problem isn’t so much with digital assets per se, but in our innate human nature and the desire for bigger numbers and faster money. Digital assets are merely another instrument and a means to an end, and have inevitably become the latest punching bag for our inability to reconcile the human tendency for wanting more.
However, this is where recent market crashes are a boon and not the bane for our industry. It’s a wake-up shock for us collectively and the watershed moment that can lead to greater transparency and visibility for future investors. 42 per cent of survey respondents expect that most assets in the future will be digital, and this is aligned heavily with many player’s vision of a more sustainable and mature industry, including ourselves.
The days of quick rewards are fading fast and it is encouraging to see more longer-term digital assets investment strategies form as the industry matures. It will only be a matter of time before incoming regulation and growing technological maturity stabilise the market and bring risks to a more palatable level.
The Road to Success is Paved With Failure
The digital assets industry has charted a clear path ahead. Whether it will succeed or not will require firstly, more education and a greater understanding of what investing in digital assets entails. Secondly, it will benefit from further professionalisation.
Education is critical for adoption. 46 per cent of sceptical investors say a lack of understanding is a major barrier to investing, and 34 per cent overall admit to investing without fully understanding what they are doing. These numbers are concerning and suggest there is a big education gap.
This is where professionalisation can help. Continuous engagement with long-term and institutional investors, will lend their expertise and legitimacy to the industry. More than half of investors surveyed said they were more likely to invest into digital assets if traditional financial institutions offered relevant services and also felt reassured by their presence.
Ultimately, the road to success is paved with failure. The path forward will be rocky and there will certainly be more pain and learning points for investors. However, now is the time, more than ever, to better understand the perceptions around this nascent industry and plan for a future with digital assets en-masse.