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Bitcoin, crypto and the future of money
It has been an incredibly busy few months for Bitcoin and cryptocurrencies in general, with news this week that fund manager Pendal Ltd (ASX: PDL) had established positions in the currency. This follows a number of high-profile hedge fund managers including Stanley Druckenmiller and Paul Tudor Jones confessing their own allocations. Given the currency is once again nearing all-time highs, we caught up with Matt Harry, fund manager at blockchain application development and digital asset management services company DigitalX (ASX: DCC), to discuss the current position of the market.
Matt, firstly a bit about yourself. Can you give us a background summary on your career so far?
My background is in wholesale currency trading and corporate and institutional foreign exchange risk management. I worked in both bank and non-bank roles across traditional markets for around 15 years before migrating to the digital asset space about four years ago. I established one of Australia’s first digital asset management companies, Cloudbreak Asset Management, in mid-2017 ,which served as investment manager to two digital asset funds. More recently I took the role of Fund Manager at DigitalX in the second half of this year. I had got to know Leigh Travers, CEO of DigitalX over the last four years at industry events, and found his professionalism and digital asset IQ really impressive. Like many in our market, I had watched DigitalX closely as the leading public company in our space in Australia.
Where did you start and what attracted you to the crypto sector?
I had been aware of Bitcoin for several years during my time in traditional markets, and thought it worth keeping an eye on, as I liked the concept. But my study into what Bitcoin and digital assets were and why they were valuable really didn’t start until mid-2016. I was in Austin, Texas, on business and saw that many of the take-away food outlets were accepting Bitcoin as payment. I thought, “Wow, OK, this thing is really starting to gather some pace, I’d better educate myself properly around what it is.” And that was the beginning, really, of my journey. The more I learned, the more convinced I became that Bitcoin would not only be something that survived, but that it would change the way in which individuals would store and exchange value across the globe. I am sure many of your readers will feel the same way as I did, working in the traditional space, and that is that often you feel like you are providing a fairly generic client solution, regardless of which organisation you work for.
You can slice and dice it a million ways, but traditional is mature, and it is extremely difficult to provide a truly differentiated product. True surplus value is often illusory. Once I learned what Bitcoin was and what it could be used for, it was like the world opened up in front of me. I could see the enormous potential it had and the value that I could bring to investors by providing safe, secure access to the asset class. Once we started to run the numbers, we were further solidified in conviction when we found that even small allocations of Bitcoin into more traditional portfolios provided a significant improvement in risk-adjusted returns. I had found value and I wanted to bring that value to every investor.
Tell us a bit about the current state of the Bitcoin market?
The Bitcoin market has never looked better. On a weekly closing basis, we are now back where we were during the peak of late 2017, but the beautiful part about it this time around is that barely anyone, apart from institutions, has been taking any notice. It really is the perfect storm for Bitcoin right now with the global environment of zero/negative interest rates, super-easy monetary policy and QE. Bitcoin is a finite supply asset that runs on the world’s most secure computing network. It is highly portable, divisible, and importantly, it is beyond the hands of central bankers’ ability to inflate-away its value by over-supply.
Institutions are assessing these characteristics as highly valuable and, in some cases, superior to gold; and they have been increasingly not only establishing the infrastructure for the market to function smoothly, but in the case of funds and public companies, directly holding the asset themselves.
Why is it such a big deal that institutions are buying in?
It is a big deal for many reasons really. Firstly, there is the “downside cushioning” and improved liquidity that deeper institutional participation brings. But more importantly, Bitcoin is the decentralisation of money, it does not have government backing, it relies on the security of the network and the trust and preferences of the people for its survival. The more we see institutions buying in, the more credibility the asset garners, the more trust it inspires, and hence the stronger it becomes. This attracts more miners, making the network more secure, which again, makes larger players more comfortable allocating to crypto. Participation begets participation. Dynamically, Bitcoin responds extremely favourably to increased participation and institutions are an important piece of that formula. We also see notable macro investors allocating and the world’s largest money managers and financial services companies releasing price targets on Bitcoin well into the hundreds of thousands of dollars over the coming two years – this really lowers career risk for investment professionals as the investment case continues to find an ever-increasing chorus of approval. We are right at that point now, in our eyes, where career risk has reduced, but we haven’t yet commenced the next great leg of price discovery so there is a real opportunity for advisers that like to think differently and provide real value to their clients to differentiate themselves. This does not need to be an all or nothing play – this is about responsible allocation in the 5% range for most investors.
