Cryptocurrencies have had a tough year, facing harsh criticism after failing to live up to their billing as an inflation hedge and instead crashing in value.
Market leader Bitcoin fell below €20,000 per token at the time of writing, after reaching a peak of close to €55,000 in November 2021.
But a recent survey commissioned by WisdomTree, which launched three crypto exchange-traded products last year, found more than a quarter of adults aged 18 to 30 in the UK were invested in the asset class – a similar level to those who had placed money in stocks and shares ISAs.
In the first of a two-part series, Citywire Selector spoke to Jason Guthrie, head of digital assets at WisdomTree, and Ha Duong, crypto specialist at BIT Capital, to ask them why younger people may have a greater affinity for the asset class and whether it expands beyond the UK.
A generational thing?
Guthrie (pictured) said the technological aspect of crypto was an attraction for younger people, but there were other selling points.
‘Younger people are coming to invest their money towards things that they feel they have a connection with. There is the technology side but there is also a bigger promise of what crypto could deliver.
‘There’s the libertarian side of bitcoin that resonates with some people – the idea that this is natively available and you can essentially get a lot more control over it.
‘There’s also talk around it creating a more inclusive financial services system. From a social perspective that resonates.
‘The idea of dis-intermediating large chunks of the incumbent financial services system. Anti-Wall Street sentiment has been hanging around since 2008 and is definitely part of the community element of the wider crypto movement.’
Guthrie said the real attraction of crypto was its eventual evolution into a more stable system, rather than its anti-establishment credentials.
‘The idea of a less expensive, more efficient, more digital-first financial services system that could be built around blockchain and decentralized finance and is something that just works better for you, is more the sentiment that resonates with people.
‘People want to see it grow into a stable technology and asset class. That’s going to take time but the majority of people who invest in it realize that it is nascent technology. That is why people are happy to invest despite the volatility.’
Financing the fringes
Duong, who runs two crypto-focused funds at BIT Capital, said the asset class can offer financing to people who might otherwise be excluded.
‘Certain societal groups may not have the same access to financial services that you and I have, where it’s very difficult, for example, to access a margin loan product.
‘This is particularly the generation that grew up with computers and the internet. Knowing they can source different types of information and products online, they will find it very natural to also source a margin loan from their computer, rather than going to a high street bank.’
Duong told Citywire Selector, as with other volatile asset classes, crypto was also more suitable for younger investors. ‘People who still have a long time until they reach retirement can take more risk in terms of their asset portfolio.
‘If I was 60 years old, I would probably want to invest in fixed income. If I’m 40 years old, I can have a higher equity mix. If I’m 25 years old, I can dabble around with crypto as part of my portfolio.’
Still in the beta stage
Both Guthrie and Duong drew parallels between cryptocurrencies and the internet in terms of technological development and maturity.
‘The birth of the internet was 1994. Prior to that the IT sector didn’t exist as a sector within the equities market and it’s gone to more than 30% within a 30 year time period,’ said Guthrie.
‘Adoption of crypto has been following a similar trajectory and it feels like right now we’re at about 1998/99 in terms of where the internet was. It will not move in exactly the same way, of course.’
Duong said he viewed crypto as similar to a tech start-up that had been publicly listed at a very early stage.
‘It has venture capital like returns but with public market liquidity. You invest in start-ups, they are very volatile and they have a very high probability of failure but don’t have a daily or hourly price chart.
‘If you were to map the probability of success of the average start-up, and were to give it a daily price, it would be as volatile or more volatile than crypto. Both ethereum and bitcoin still consider themselves in the beta stage, not the alpha stage, of development.’
He said he hoped crypto would mature as a technology with the next two decades.
‘If you asked people in 1995 about a potential time frame of internet applications it would also have been difficult. Would you look at things like Amazon and pets.com, or second wave things, like Airbnb and Uber, that took another decade to form?
‘It’s still too early to think of all the potential that can kind of come out of this. We’re at a stage where we are trying to build existing products and value propositions that already exist in Web 2.0, in a Web 3.0 way.
‘We have already seen trillions of market value being transacted for a certain small number of early adopters but, in the context of 8bn people globally, it’s still very early stage.’
Different tokens, different uses
Duong said different coins have different uses, which is a key point for investors to understand.
‘If you look at bitcoin, people tend to think about it more as a digital gold, whereas if you talk about ethereum, people tend to think more as a decentralized version of Amazon’s AWS or Microsoft Azure’s cloud platforms.
‘If you think about these two value propositions, you need to value them very differently,’ he said.
He said this year had raised big questions whether bitcoin would live up to its billing as a digital safe haven store of wealth, like gold.
‘People ask what is exactly the intrinsic value of bitcoin? It’s the same argument as with gold. Even though gold has some industrial value and as jewellery, most of its value comes from its potential monetary premium as a store of value,’ he said.
‘In terms of bitcoin’s value as a potential inflation hedge, we saw this year that this narrative hasn’t worked out super well.
‘But we still need to remind ourselves that it’s something that’s only been alive for just over ten years. Assuming it can compete with something that’s been in use for millennia is very difficult.’