Flipping the Crypto Script

About “Flipping the Crypto Script”

To coin a phrase, cryptocurrencies have simply become too big to ignore. But, whatever your view of these relatively nascent financial innovations, we can surely agree that better understanding will lead to better decisions. With that spirit in mind, the DWS Research Institute sat down with four senior leaders, two from DWS, and two from the digital asset manager and our strategic partner, Galaxy, to discuss several topical issues for investors as they evaluate this space. We hope their insights help you to take a considered and thoughtful approach to cryptocurrencies.

Setting the Stage – The Investor Case for Cryptocurrencies

Thomas, could you give us your headline thinking on cryptocurrency, its development, and the investor use case?

Thomas:

First, one should probably say “cryptocurrencies” plural, it’s a wide field! I think there are thousands of them. In terms of investing, I mainly think about Bitcoin, and maybe Ether, and that's about it because all the others are out of scope for us now. It's a new asset class. Bitcoin is only 14 years old. It has grown a lot, created lots of interest, and I think it has a certain utility in the marketplace. If you look at an emerging market, it will be immediately clear why that is the case, but it may be less obvious when you live in Germany or in the U.S. Nevertheless, I think about it as a store of value, and as a currency that is outside of the central bank system. These would be the key points of attraction for me as an investor.

Bjoern, your thoughts?

Bjoern:

I find it pretty fascinating, and as a firm we are always excited to understand an emerging asset class. Finance has always been, and will always be, innovative. And it’s part of our job as stewards of capital to understand and evaluate these innovations. I realize the underpinnings for the founding of Bitcoin, and other cryptocurrencies, is partly a symptom of the global financial crisis with its undercurrents of concern at government bailouts and the soundness of the traditional institutions. For example, one original intent was to create a currency that was not based on a fiat system, and so couldn’t be inflated away. But we have really moved on since then, as use cases have developed. Now I think investors are holding crypto for other reasons too. Perhaps for simple price appreciation, or as an alternative means of payment, or as a diversifying asset.

Along with that growing use case, there has come a growing financial ecosystem. We have futures on cryptocurrencies, we have researchers, analysts, dedicated asset management firms—one of which, Galaxy, we are delighted to have a strategic alliance with—institutional sales and trading efforts at major banks, not to mention teams of digital innovation professionals at firms like ours, who work hard to understand how crypto and blockchain could change the way we do business. But ultimately, we care about the benefits for our clients, whether that be products that enable access, or new ways of digital trading, clearing, and confirming transactions. Like many new technologies, we don’t exactly know where we’ll end up, but we must be involved.

Absolutely. Galaxy, thoughts to add to this? Perhaps specifically from the asset management use case as opposed to the payments case?

Steve:

I think we’re still early, and the crypto community doesn’t understand yet that just because Bitcoin is 14 years old, that means it necessarily needs to, or should, have a footing in an institutional context, in a portfolio context, in an allocation framework context. Bitcoin has had 10+ years as a network of really being tested - the kitchen sink has been thrown at it! At different times Chinese policymakers have banned industrial crypto mining, though the blocks kept going. We have seen resilience through multiples cycles, through regulatory questions and concerns. But behind all the headlines, you have a network that keeps running, that is robust, and resilient. You have a use case that's developing, but hasn't fully landed into portfolios. And you have a macro picture that I think allows for a really important story to be told about Bitcoin and its potential uses in a portfolio.

The big tension about cryptocurrency is expectations that just because this system is beautifully designed—which I happen to think it is—the adoption needs to happen immediately. Thinking about crypto as an allocation, and not a trade, and where to source it from is just being worked through now. I think Bitcoin is like a teenager, or a pre-IPO growth company, not a public company, if you want to put it that way. We're stepping into a much bigger phase for Bitcoin over the next three to four years.

I like your point about being tested in a few different ways in the market environment, because it is important for any asset class. And presumably the more cycles it survives through, the more robust it becomes.

Steve:

Bitcoin has certainly been tested relative to the toddlers in the space. In a way it is like the Internet. It is like judging everything on the Internet in 2001. We're just developing this new asset class, and this new technology. Our approach at Galaxy is much less about trying to defend, or even define, all of a decentralized, open-source global phenomenon, and much more about parsing through that and focusing on two things: those cryptocurrencies that matter today and are investable, and those that are not yet investable today, but also matter. And then there's a big tail that doesn't really matter too, and that's okay. The goal is sifting through all of that, and being consistent with a framework for how you see this space in a portfolio context.