Where do digital assets, cryptocurrency and the blockchain stand today in terms of investment opportunities? How can they best be understood and evaluated? Roger Bayston, EVP and head of digital assets at Franklin Templeton, offers his observations.
Digital-asset products and services are expanding rapidly. What do you see as the best opportunities?
Depending on the audience, there are a range of options emerging: For investment managers, there is promise in the adoption of new technology rails to improve the efficiency of trading in real-world products that still require manual interventions, save operational costs around portfolios through superior blockchain and smart contract-based processes, and extend their opportunity set via new financing options enabled by blockchain and digital assets. For family offices and high-net-worth investors, there are VC funds, an ability to own “liquid” VC via direct crypto token purchases, as well as opportunities to invest in new forms of assets, such as art and luxury good NFTs. These investors may also take on a new role and issue their own NFTs to create liquidity around assets they already hold that are otherwise difficult to monetize.
For retail investors, opportunities to invest in these types of assets will be possible, but they may need to wait for regulators to finalize rules and frameworks to ensure that adequate consumer protections are in place.
Cryptocurrency is having a rough time. How do you expect it to fair?
Cryptocurrencies are highly volatile and the asset class offers both opportunities and risks. The new ecosystems that issue cryptocurrencies and tokens operate in a decentralized manner that relies on transparency and a community of validators that must collectively reach consensus to approve a transaction. Even as bitcoin and crypto prices fell sharply in recent years, the number of developers engaged in the space grew. These innovators are continuing to build and refine their offerings. In many ways, these blockchain-based ecosystems are like digital nation states. They have their own currency, their own governance structure, they have built their own economic rails, and they have entrepreneurs building businesses on those rails. Given this reality, our view is that over the mid- to long-term, these ecosystems represent tremendous growth opportunities for investor portfolios and will become a key portfolio exposure in coming years. In many ways, they are the new “digital” emerging markets.
How widespread is investing in digital assets to date, and where do you see it going in the future?
There have been waves of interest in investing in digital assets that ebb and flow. Most recently, we saw a big surge of retail money coming into the crypto markets during the COVID crisis as people were in lockdown and as government money was being distributed. Many individuals used that period to explore cryptocurrencies and experienced both an extreme price rise and then an equally sharp price decline. Retail interest has since waned, but many institutions and wealthy investors that can afford to take a longer-term view of the opportunity have begun to build positions on market pullbacks. Over time, these investments could provide a foundation to the crypto markets and position the industry for another bull market, at which time retail interest may reignite.
Meanwhile, the technologies are being explored by existing financial firms and investment managers. They are using blockchain, smart contracts and tokenization to explore new use cases such as issuing bonds, tokenizing funds, and trying new types of financing models.
What makes sense for a high-net-worth investor’s portfolio?
The most important rule in building a successful investment portfolio is to pursue diversification to help balance risk and reward. Crypto assets today may be considered for a small allocation of the portfolio for those investors that are able to tolerate higher risk opportunities. A good rule of thumb is to keep this allocation limited (e.g., less than 5 percent of a portfolio) to ensure that any potential losses would not undermine the investor’s long-term goals, and to still leave enough exposure that a successful outcome might offer meaningful returns.
What about the future of digital assets? Where are we headed?
Technology innovation is constantly changing the ways that we invest and the opportunities that we invest in. Tokenizing equities, bonds, investment funds, and cash offer the opportunity to rebuild the existing financial system in a more efficient way that saves costs, reduces operational frictions, and removes unnecessary intermediaries. Using wrappers like NFTs can open up investment opportunities into a broad array of new assets, helping individuals to diversify their portfolios.