At the Forex Network New York event, Galen Stops, editor of Profit & Loss, sat down with Rob Catalanello, CEO of B2C2 USA, to talk about whether the case for including cryptocurrencies in an investment portfolio is as strong as ever.
Galen Stops: In 2017 when the price of cryptocurrencies kept going up and up, the appreciation of these assets was an obvious argument in favour of investing in them. But now that we’ve seen the price come way down from those heady highs, is the case for including cryptocurrencies in an investment portfolio still as strong?
Rob Catalanello: Well, if you’d asked me 18 months ago, I would have said: don’t confuse brains with a bull market!
We’ve seen massive washouts in all sorts of markets over time. For example, crude oil went from nothing to $140 per barrel and then back down to $30, and then you had the tech stock bubble – back then I used to walk past the New York Stock Exchange and see some company that was selling coffee mugs online IPO-ing at $9 billion or something ridiculous like that.
This happens, but something that I’ve learnt in my career is that as assets mature and there’s a demand in the real economy for them, that’s when you start to get a base of value for those assets. I’ve spent the past two years working as a consultant for a couple of blockchain technology companies, and as the coin prices were ripping to the upside they, much like firms in the real economy, didn’t want to touch this because they couldn’t afford it, they couldn’t afford to pay a miner to put the block together for them. And as the price has come down, the demand for the underlying technology, whether utilising one of the existing coins or some other form of it, has really gone through the roof.
So for that reason, as well as the proliferation of other tokens that we’re seeing that are attached to hard assets, like oil or gold, I do think that there’s still a place for cryptoassets in investors’ portfolios.
GS: Another argument in favour of including cryptocurrencies in a portfolio that I’ve heard a lot is because they’re uncorrelated to other assets. But as more institutional level players get involved in this market, is that still the case? For example, we’ve seen a lot of prop trading firms become very active in the crypto markets, and because they trade across a number of different asset classes their models generally mean that if they get hit in one market it will impact their pricing in other markets. So doesn’t this start to naturally build correlations between cryptocurrencies and other assets?
RC: I actually did my master’s thesis in statistics and this question reminds me of something my advisor said when I was writing it. He said: “Give me a time series long enough and I can come up with any conclusion you want.”
What I’m saying here is that the actual time series of tradable prices and real data available in this space is very limited, so trying to come up with robust correlation calculations versus other asset classes is difficult.
It’s a bit like we saw in emerging market currencies – initially it was hedge funds that wanted to trade these currencies, liquidity was spotty and if something was happening in Indonesian rupiah they might want to trade Mexican pesos, or if something happened in Mexico they would start dumping pesos and buying other currencies. But once the corporate community got involved and started to hedge their revenues in emerging market currencies, that’s when the currencies became tradable and non-correlated. So I think we’re just going through a similar adjustment process in this asset class.
GS: Isn’t another problem just the scale at which most large institutional players invest? I mean, if I wanted to buy $1 billion of bitcoin, that’s probably going to be pretty challenging, especially considering there are people out there still trading via Skype…..
RC: The reality is that you really can’t buy $1 billion of bitcoin today, you just can’t.
That being said, we at B2C2 just completed our one millionth OTC crypto trade, but that’s not including all the trading we do on exchanges. At this point I think that we have a pretty good handle on all the back office issues, the settlement issues, all the payments that need to be done, etc. We’re streaming prices – actual dealable prices, not the type of prices where you try to hit it and suddenly it’s gone away – we’ll connect to your API, if you want a GUI you can have that, if you want to call us we’ll do that too.
So I think that the service level in the crypto markets is getting towards the level that institutional clients, and particularly the real money clients, are accustomed to and expect. I think that will make it easier for them to make the leap of faith into this market, regardless of its size. Once people realise that they can store their coins safely and securely, that the fiat money is going to show up when they expect it to, that everything is going to settle on time in the accounts and that they can get the same sort of service they would get from an FX desk, they will become much more confident about investing and trading in this market.
GS: But even putting aside this question around infrastructure for the moment, isn’t part of the problem that the actual size of the crypto markets is simply not big enough to move the dial for a lot of institutional sized players?
RC: It depends. If I wanted to put trillions of dollars to work, to take all of Pimco’s assets and put them into crypto then you might not be able to do it. But if you have a fund with a few hundred million dollars, you could easily put that to work in this market. So it really depends on the size that you’re talking about here. Clearly, this market is not as liquid as FX, but there is enough whereby institutional investors can be involved in a meaningful way.
GS: So when the price of cryptocurrencies was spiking, people were constantly talking about this wave of institutional money that was going to move into this space. So far we haven’t really seen this materialise – is this still coming and what’s held it back so far?
RC: Let’s face it, some people still don’t understand the crypto markets and a lot of people were confused about what the assets were. But what I think has happened is that the decline in the value of these assets has shaken out some of the more marginal players in the market, which is a good thing.
People want to be confident, not just in the asset that they’re trading, but in their counterpart to a trade. The fact that an asset goes from 60 cents to $1,000 in 12 months is great, but that doesn’t make a market. And it doesn’t mean that professional investors will be confident they can fulfill their fiduciary responsibilities to their clients while trading this asset.
I think that the drop in price has actually been healthy because the people that have weathered the downturn and are still here are the ones that have worked hard to deliver pricing, customer service and security to make investors more comfortable in this market.
GS: Ok, one last question. At one point the narrative in financial services was very much that bitcoin was bad but blockchain was good. Then there seemed to be a lack of actual useful blockchain solutions coming to market while cryptocurrencies took off again. Is there a danger that the pendulum swings back once more and investors start focusing on ways to invest in blockchain the technology as opposed to cryptocurrencies?
RC: If the blockchain firms are coming up with more efficient ways to mine coins, and that in turn helps broader acceptance of the product and adoption of the underlying technology, it’s sort of a virtuous circle. I think the most important thing, though, is for people to really do their homework and try to understand what it is they’re investing in as opposed to buying something because it’s going up or selling it because it’s going down.