Can bitcoin establish itself as a viable asset class?

Cryptocurrencies are opening up an entirely new asset class for investors, says analyst


BITCOIN could emerge as a safe-haven asset in the not too distant future, despite its well-documented volatility by acting as a hedge amid times of financial turmoil.

Until it is accepted as a substitute for currency, the cryptocurrency or purely peer-to-peer exchanged digital cash will continue to fall short of becoming a viable asset class.

After gaining 151.4% in value this year to US$9,719.72 (RM40,726), bitcoin slumped as much as 17.5% to US$8,019.73 yesterday, attesting to the dizzying volatility surrounding the cryptocurrency.

But bitcoin, which was the world’s first and now leading cryptocurrency in the market, continues to grow in popularity and could prove to be a new tool to hedge against declining returns from traditional investments.

Sagar Chaudhary, junior analyst for global social trading network eToro, said cryptocurrencies — apart from providing people the opportunity to have control over their funds without the need of a third-party entity like a bank — are opening up an entirely new asset class for investors.

“The nature of cryptocurrencies has, for the first time in history, allowed people the opportunity to have full control over their assets which are the cryptocurrencies themselves,” Chaudhary told The Malaysian Reserve (TMR).

Chaudhary said bitcoin traded at a premium during times of economic uncertainty, while boasting some of the highest return on investments compared to other investment vehicles in the market today.

“Cryptocurrencies don’t ideally feature in the list of safe-haven assets, but we now see bitcoin being compared to gold. Bitcoin could play a role as a safe haven in times of uncertainty,” Chaudhary said.

Recent data on bitcoin wallet activity give us a good indication that most bitcoins are still being used as a store of value as opposed to being used for payments. Moving forward, cryptocurrencies will feature more prominently as a hedge against traditional markets, he said.

Bitcoin was first introduced to the market back in 2008 and sought to provide a platform to allow for online payments to be sent directly from one party to another without going through a financial institution.

This was in view of avoiding double spending that would arise if a third-party (bank or financial institution) were to facilitate such exchanges. Today, bitcoin is a part of industry boasting a market capitalisation of US$220.68 billion, with the maiden cryptocurrency contributing to 68.8% of that total value, according to a check on yesterday.

But the jury is still out on the future viability of bitcoin and cryptocurrencies in general.

Oanda Corp senior market analyst for Asia Pacific Jeffrey Halley said one of the biggest problems facing bitcoin is the absence of any macro inputs to help determine the “fair value” of a bitcoin.

“This will take time as databases are built regarding response, reaction and correlations to normal market events and reactions,” he told TMR.

“At the moment, direction is purely driven by sentiment and sentiment can twist and turn in a very short period of time.”

He added that it is difficult for bitcoin to establish itself as a viable asset class if it is not accepted as a medium of exchange (ie a substitute for a nation’s currency) in countries like the US, Canada, the European Union and China.

Halley also noted that one of the appeals of cryptocurrency, namely its concealed transactions, is unfavourable for countries and exchanges that are heading toward a more open and transparent transaction regime.

“Over time, we are likely to find that cryptocurrencies will start to respond to market events, data and headlines just like currencies and other asset classes, once the usage becomes more widespread with a deeper price-maker pool,” he said.

That may be a few years coming and, in the meantime, it’s likely to still be regarded as an “irritating upstart” by more established markets, he stated.

Meanwhile, Chaudhary said each cryptocurrency in the market today has its own unique propositions, but the use case of each is among the factors that need to be considered.

“Several projects are riding the crypto wave, but not all cryptocurrencies out there are going to survive without a definite use case. Crypto assets aren’t much different from traditional assets in this sense,” Chaudhary said.

“Long-term viability depends on what they offer. Strong fundamentals are always a plus.”

Chaudhary added that investors should pay attention to what the liquidity and trading volume is for a particular crypto asset, as cryptocurrencies without enough liquidity are prone to price manipulation.

For its part, bitcoin is a cryptocurrency whereby every transaction is recorded in a blockchain, or shared public ledger, which contains records of each and every transaction that takes place.

In Malaysia, cryptocurrency exchanges or digital asset exchanges are governed by the Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019 and the revised Guidelines on Recognised Markets.

Luno Malaysia Sdn Bhd, Sinegy Technologies (M) Sdn Bhd and Tokenize Technology (M) Sdn Bhd are the three approved digital asset operators in Malaysia today.