Digital assets are quickly becoming a major investable asset class, headlined by cryptocurrencies and blockchain. With the market capitalization of cryptocurrencies surpassing $2.5 trillion at the end of October, many investors are exploring the value that cryptocurrencies and other digital assets bring to portfolios. Global inflows into digital asset investment products total $8 billion on a year-to-date basis, with October month seeing record inflows as the result of the first futures-based bitcoin ETF listing on the New York Stock Exchange.
“The blockchain industry has evolved at a remarkable pace over the last year, with digital assets becoming an important emerging asset class for investors,” said Chris Mellor, Head of EMEA ETF Equity and Commodity Product Management at Invesco. “While cryptoassets gather much attention, the entire digital asset ecosystem presents an opportunity for investors, and the way investors can access this alternative asset class is expanding rapidly.” Digital assets encompass more than just cryptocurrency and blockchain; the ecosystem also includes companies that mine cryptocurrencies and provide technology, as well as companies that might benefit from blockchain technology. Large global corporations and governments have begun to explore the advantages of leveraging cryptocurrencies and blockchain technology to improve their operations.
“As adoption grows, digital assets can play an important role in a diversified investment portfolio,” said Mellor. Digital assets, as do most alternative investment classes, operate independently from traditional asset classes such as equity and fixed income, potentially offering diversification benefits in the event of a stock or bond market downturn. Moreover, with the growing threat of inflation, digital assets with a finite supply in circulation, such as Bitcoin, may have the potential to hedge a portfolio against inflation as more assets cannot be created beyond the limit. The possibility for capital appreciation is also a consideration for investors, as digital assets could potentially move higher in value as more investors include it in portfolios. “Investors need to recognize and balance the risks and rewards of including this new asset class in their portfolio,” cautioned Mellor.
In addition to owning digital assets directly, several investment vehicles have emerged that allow investors to add diversified exposure across the blockchain spectrum to their portfolio. Exchange-traded funds (ETFs) in particular offer investors exposure to narrow or broad aspects of cryptocurrencies and the blockchain ecosystem in one fund, without physically owning the underlying assets. Several ETFs on the markets today have allocations to companies with exposure to the sector, focused on digital assets and blockchain. The field of funds with direct exposure to cryptocurrencies is narrower.
The recently launched futures-based Bitcoin ETF on the NYSE gives exposure to bitcoin futures contracts, rather than the spot-market price. Outside of the US, international markets offer cryptocurrency ETF/ETP (exchange-traded products) that are directly invested in spot crypto.
Alessio Cirilo, Sales Director at Invesco EMEA, said: “These new ETPs give investors an excellent, cost-effective and liquid means to gain exposure to the growing digital asset class. With the growing number of ETPs on offer in this space in both the Americas and Europe, MENA-based investors interested in cryptocurrencies or blockchain have a broad range of opportunities to consider.” ETPs are investment vehicles that are listed on regulated exchanges and can be traded like stocks throughout the day. ETPs are reputed for being relatively cost-effective and efficient investment vehicles to gain exposure to diverse assets.
