Unregulated markets, frauds, speculation, opaque business concepts, volatile returns. Actually no investment theme for institutional investors. Or is it? Behind the superficial headlines a new asset class is emerging. The first institutional investors, above all large hedge and venture capital funds, are already investing huge sums.
There is no traditional evaluation framework such as those known from equities or bonds. The approach is more differentiated. For example, the valuation may be derived as a function of the high savings potential of transaction times and costs in the transfer of values. The store-of-value function may also play a role, which, due to the shortage of individual cryptos, exists within a fixed, limited supply framework, as is the case with Bitcoin.
A new asset class for institutional investors must also provide sufficient liquidity and alternative investments and ideally should have little or no correlation with other assets. Today, there are more than 500 crypto exchanges on the market which offer trading and thus liquidity for a large number of crypto currencies, and the number of secure access options as well as offered trading products (derivatives, EEFT’s, Funds… etc.) increases day by day.
The correlation of the major crypto currencies to the S&P 500 is relatively small, in some cases lower than gold is for this important world stock index.
But it must be clear: Due to the high volatility, the still unregulated and unclear framework conditions, as well as the high risk-return ratio, this asset class is currently only suitable as risk capital and may only be used by professional investors in a diversified portfolio context.