All asset classes are created equal, but are some more equal than others?

(First published October 2022)

Earlier this year, for the first time in more than a decade, Netflix reported negative subscriber growth. That was a Tuesday, and by Wednesday, the streaming giant’s stock dropped 35%, wiping out $50 billion of value. Earlier this month, three major stock indexes on the US stock market had their worst day since June 2020. Closer to home, conservative Kiwisaver funds have been posting losses that have, in some cases, seen investors complain that they’ve lost more than they contributed all of last year.

It would seem that non-Crypto asset classes are ‘allowed’ to experience typical economic cycles and afforded the benefit of the doubt when these eventuate, with everyone speculating where the ‘floor’ is. (Even Air NZ’s current in-flight magazine has a piece on ‘The silver lining of this year’s market weakness’ by Mark Lister, Head of Private Wealth Research. The size 20 bold font takeaway? “For those with a long-term horizon, investing in companies at depressed prices should be a far more exciting prospect than buying them near all-time highs.”)

But not Crypto. When it comes to ‘the asset class people love to hate’, Crypto wins hands down. In my opinion, there’s been a disproportionate amount of negative press devoted to its most recent dip. The headlines currently scream at us: ‘Crypto is dead’; ‘…the tech that could but didn’t deliver’ and even ‘Why we don’t need a third web…’. (Imagine for a moment a similar header, i.e. ‘Kiwisaver funds are dead’. Highly unlikely.)

To mis-quote George Orwell’s allegorical novel Animal Farm in which the ‘All animals are equal’ is changed to read ‘All animals are equal but some animals are more equal than others’, it’s as if all asset classes are created equal, but are some more equal than others.

Admittedly, Crypto is unlike any other asset class, and it does behave differently. This piece on the Crypto price innovation cycle offers a fascinating look into Crypto cycles, stating that “People who’ve been in crypto for a long time view the space as evolving in cycles, alternating between periods of high activity and ‘crypto winters.’ There have been three cycles so far. The first peaked in 2011, the second in 2013, and the third in 2017.”

Keeping this cycle in mind, many large institutional investors have ventured into Crypto recently; as well as seasoned operators from web2 companies, finance companies and those entering the web3 space. This will all lead to the launch of new products and services that will drive the next cycle.

Ian Taylor, the executive director of CryptoUK, an independent industry body that exists as a cohesive, credible voice for the evolving United Kingdom crypto industry, wrote recently that he believes “After the unfair battering it has received over the years, the time has come to defend digital currencies.”

What he is referring to is Bitcoin’s initial reputation as the currency of the underworld favoured by the dark web and money launderers.

Despite El Salvador declaring Bitcoin as a legal tender in September; the first Bitcoin futures-linked exchange-traded fund (ETF) in the United States began trading on the New York Stock Exchange and Visa launching a Global Crypto Advisory Practice in December, some simply haven’t (or won’t?) move on.

These ‘haters’ are forgetting that Crypto, unlike more traditional assets, has the potential to solve some of the biggest financial challenges of our time. Their fears around a perceived ‘loss of control’ actually highlight the strength of this asset, including:

Banking without borders

1.7 billion people worldwide don’t have access to a bank account (World Bank). Crypto is a decentralised currency that puts people (even the unbanked) in charge of their own money and has the power to transform the existing financial ecosystem. It represents financial inclusion and a system that is free of high fees and profit margins.

Taming political turmoil

Venezuela is a great example of citizens using Crypto to convert their wages and using the blockchain for moving money and payments to beat inflation caused by global sanctions.

Calming corruption

In developing countries, Bitcoin can help eliminate corruption thanks to the nature of a public ledger.

Smarter money through smart contracts

Smart contracts are often all that is needed to replace traditional banking or legal services; and digital wallets can enable credit with no centralised entity required.

Crypto is not without risks; but neither is any asset class. In a world where some people are still ‘more equal than others’; it would be wise to recognise its potential to create a more level playing field and, perhaps, consider affording it the same ‘more equal than others’ privileges when assessing its performance?

Disclaimer: Crypto is volatile, caries risk and the value can go up and down. Past performance is not an indicator of future returns. Please do your own research.