The Indian government has turned its attention to cryptocurrencies in 2021 as more people take interest in this investment option that is truly digital. The stance remains cautious, but regulations are on the way to ensure buyers’ security and curb illegal usage.
However, the debate among enthusiasts seems to have moved from whether to buy cryptocurrencies or not to choosing one that is the least volatile. For retail investors, caution must remain the mainstay of investing in this asset class.
Cryptocurrencies have given volatility a new meaning; prices of coins vary sharply within a span of minutes. Even marquee coins such as Bitcoin (BTC), Ethereum (ETH) and Binance Coin (BNB), the top coins by market value, have seen spectacular spikes and crashes during the year. But if we take a step away from all the noise and look at the overall picture, a silent trend emerges. Volatility in the most popular cryptocurrency, Bitcoin, is reducing.
According to CoinDesk’s Q3 quarterly review, volatility in Bitcoin was less than the historical spikes. The peaks are also lower. The annualised 30-day volatility was a maximum of 94 per cent in Q3 versus 101 per cent and 113 per cent in the first and second quarters, respectively.
The six-month measure of Bitcoin in 2021 has stabilised at around 73 per cent, according to Sharat Chandra, a blockchain and emerging technology expert and advisor to blockchain startups.
The direction of volatility too tends to be defined by Bitcoin for almost the whole crypto market. “Bitcoin price volatility is considered as a bellwether for most tokens,” says Ajeet Khurana, an advisor to crypto projects. Apart from a few days of sharp price swings over the past decade, the cryptocurrency’s volatility has been decreasing in recent times, “be it a quarterly or a yearly comparison”, says Khurana.
One of the reasons is its large market capitalisation. “It is far easier for a $100 million-asset to double than for a $2 trillion-asset,” he says.
Time and acceptance are also chipping away at the volatility, say experts. Bitcoin, for instance, has been around for more than a decade. “As an asset class, it is gradually inching towards maturity and wild volatile swings will soon be a thing of the past,” says Chandra.
At present, cryptocurrency prices are speculative, primarily driven by investors’ expectations of multi-fold gains, says Prashant Garg, partner, technology consulting, EY. “There are several cryptocurrencies and investors don’t understand all of them. In the long run, as investors become more crypto-educated, they will invest with care.” As more investors come in, there will be a need for more transparency. “At present, cryptos are not fully regulated or auditable,” says Garg.
ETFs Smoothen The Road
Acceptance has strengthened also due to introduction of cryptocurrency exchange-traded funds (ETFs). Crypto futures ETFs have made a debut on the US markets with the ProShares Bitcoin Strategy ETF. Trading on the exchange started on October 19, 2021. It got an overwhelming response and at the end of Day 1 of trading, the futures ETF surpassed $1 billion in volumes to become the second-most traded ETF among all types of ETFs on its first day.
The starting success of the Bitcoin futures ETF is also due to the fact that it has something in common with more traditional investments—the brokerage accounts are protected by the Securities Investor Protection Corporation (SIPC).
Many crypto-related ETFs are already available in the US, including Valkyrie Bitcoin Strategy ETF, First Trust Indxx Innovative Transaction & Process ETF, Simplify US Equity PLUS GBTC ETF and Bitwise Crypto Industry Innovators ETF. Australia’s regulator has also approved spot ETFs in Bitcoin and Ethereum.
“They (ETFs) will ensure better price discovery and draw more participation from institutional investors, thereby paring volatility to a significant extent,” says Chandra.
The technical expertise, risk management, long-term money and stable ownership of big funds such as ETFs build confidence among other investors, including retail investors. “They move cryptos from exchange wallets to offline wallets, bringing down the supply available for selling, thus reducing price volatility,” says Gaurav Dahake, CEO and founder of Bitbns, a crypto exchange company.
ETFs are also a way to diversify portfolios without having to own the assets. “There has been good participation from Indian investors in BITO (ProShares Bitcoin Strategy ETF) once the ETF was available on our platform,” says Sitashwa Srivastava, co-founder and co-CEO of Stockal, a global investment platform.
Institutional Investors Lend Their Weight
As a new asset class, cryptocurrencies are volatile but offer higher returns on a risk-adjusted basis than other asset classes. “The volatility is similar to gold’s during the early 1970s when gold became a mainstream asset class. We should see less volatility, going forward, as we see more retail and institutional participation,” says Dahake.
Celebrity endorsements are adding to the buzz around cryptocurrencies, and to their volatility. But there’s serious money too moving into cryptos. The largest holdings of Bitcoin, for instance, are with MicroStrategy, a publicly-traded company that provides business intelligence and cloud-based solutions. Commonwealth Bank of Australia has recently announced that it may soon allow its customers (6.4 million) to buy, sell, and hold cryptocurrency directly through its app.
As the market expands and investors look for more opportunities, cryptocurrencies are finding their way into the portfolios of wealth managers and fund managers whose decision to invest is driven by long-term capital growth prospects, high returns, endorsement by peers and beating inflation. “Traditional industry had shown resistance in accepting crypto coins but they are now seeing them as a good way of diversification. As more people of ‘more’ influence come in, acceptance will increase,” says Srivastava.
A study by Europe-based digital asset management company Nickel Digital found that more than half (53 per cent) of the participating wealth managers said institutional investors will increase their investments in alternative assets including cryptocurrencies in the next two years. “Unlike day traders, institutional investors hold a long-term view of the asset class they choose to invest in,” says Chandra.
Still Early Days
Many large investors are taking slow but steady steps towards making sizable investments in cryptocurrencies, but it’s not yet time to bring out the bubbly. For one, the legal framework around cryptos is nascent.
“As the government focuses on regulating crypto trade, businesses will see productive use of crypto and blockchain emerge,” says Garg. While El Salvador may have accepted Bitcoin as legal tender, most countries have not. In India, further regulations are expected to come out in the near future, a move much needed for the sake of users’ security, the industry’s growth and to prevent money laundering and terror financing.
“Like anything new, cryptos will go through their hype cycle. In India, it has just started. In times to come, inflated expectation will give way to real productivity,” says Garg.
Many investors are sitting on the fence and clear laws will tilt the scales. “We are waiting for the laws. Once that happens, we may consider cryptos as a means of transaction. Till then, we won’t touch it; it’s too volatile,” says Manish Kumar, CEO and co-founder of blockchain market platforms GREX (market for investors, startups and SMEs) and RealX (platform to digitally invest in real estate).
Cryptocurrencies remain a highly volatile asset class but sparks of stability in Bitcoin could be an indicator of what’s in store. Until that happens, it is advisable that retail investors look at cryptocurrencies only as a fringe investment.
Kaveri Nandan and Harsh Kumar
kaveri@outlookindia.com; harsh@outlookindia.com