27 Feb 2018
Cryptocurrencies are piquing investors’ interest around the world. Their market capitalisation has reached nearly $500 billion after dramatic price increases in 2017, but we don’t see them becoming part of mainstream investment portfolios soon. Crypto markets are highly volatile, fragmented, largely unregulated, and come with unique liquidity and operational risks.
Price volatility of US equities, gold and selected cryptocurrencies
Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index.
Sources: BlackRock Investment Institute, with data from Thomson Reuters, February 2018.
Notes: The data are from the start of 2016 to Feb. 21, 2018, except for the bar representing US equities during the global financial crisis from 2008 to 2009. Volatility refers to annualised daily realised volatility. US equities are represented by the S&P 500 index. Gold is represented by spot gold prices. Bitcoin, Ethereum and Ripple are the three largest cryptocurrencies by market capitalisation.
Cryptocurrencies are wildly volatile. We compare the annualised daily price volatility of the three biggest cryptocurrencies by market capitalisation – Bitcoin, Ethereum and Ripple – with US equities and gold in the chart above. The volatility of the cryptocurrencies makes the gyrations in the US equity market during the global financial crisis almost look placid. There are over 1,500 cryptocurrencies. Spot trading of these “coins” takes place on more than 400 online exchanges around the world – with no central order book.
The nature of cryptocurrencies makes them tricky investment targets. On top of dramatic price swings, cryptocurrencies face major challenges such as weak regulation and security flaws at cryptocurrency exchanges and other end points. Valuation is difficult, as cryptoassets have no cash flow, earnings or interest rate. Their uses vary from a speculative bet to payment medium. The market is evolving, however. Established exchanges have launched cash-settled Bitcoin futures, but so far the reception has been lukewarm. High margin requirements are one reason why. A global regulatory framework may be in the offing – how to regulate cryptocurrencies is on the agenda of a G20 meeting in March.
Cautious on Bitcoin and bullish on the underlying blockchain technology – this is an emerging consensus among policymakers and business leaders. Blockchain, a distributed ledger technology, enables secure peer-to-peer transactions. This means no intermediaries, but also no trusted centralised authority. Companies in a wide range of industries, from logistics and pharmaceuticals to financial service, are looking into its disruptive potential. Yet challenges abound. Take the financial industry. A blockchain-based, single shared financial database could eliminate inefficiencies and risks associated with human processes, but adoption at scale would require a massive shift in software development and a well-constructed maintenance model. Regulators and central bankers would also need to play a big role, we believe.
Our bottom line: We see cryptocurrencies potentially becoming more widely used in the future as the markets mature. Yet for now we believe they should only be considered by those who can stomach potentially complete losses. Similarly, blockchain needs to overcome significant hurdles to reach its promising future.
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Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.
Capital at risk. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.
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