In December, the Financial Times called it. 2020 was the year that bitcoin went institutional. Existing investors, such as Microstrategy, significantly increased their cryptocurrency holdings to the tune of hundreds of millions of dollars. Newcomers such as U.K.-based investment firm Ruffer also bought in, citing bitcoin’s capacity to act as a hedge against a precarious global economic situation.
These moves have created an unprecedented demand on bitcoin’s fixed supply, sending the price skyward. Other cryptocurrencies are also enjoying significant growth. Ethereum has posted gains of over 100 percent since it launched the first iteration of its upgraded platform in early December. Other assets, including Polkadot’s DOT token and Cardano’s ADA, have been storming up the cryptocurrency rankings.
Brian Brooks, acting head of the Office of the Comptroller of the Currency, recently wrote of his belief that decentralized finance will result in a phenomenon he called “self-driving banks.” All this creates an imperative for institutions and other players on the financial markets to enter the cryptocurrency space in a bid to stay ahead of the game.
Not For the Faint-Hearted
Even for seasoned financiers, digital assets can be daunting. Extreme volatility notwithstanding, the cryptocurrency sector remains nascent and still retains vestiges of the kind of firms and activities that earned it the nickname the “wild west” of finance a few years back.
Things have improved considerably since then. However, there is a bewildering array of exchanges, wallets, and digital asset service providers on the market. Not all are regulated. Some have a poor reputation for providing what many institutions would consider the most basic requirements – security, customer service, and a seamless user interface – to name a few examples.
Not all assets or instruments are available at all trading venues, meaning traders often run accounts at multiple exchanges to get access to everything they want. This involves undergoing multiple KYC and AML checks to get verified and start trading.
Holding digital assets also takes cybersecurity and risk management practices to a new level. Everyone who owns cryptocurrency is a potential target for hackers, who have developed sophisticated methods, including practices such as phishing or malware, to get access to users’ private encryption keys. For institutions, established security policies and procedures will likely need a full review, including educating employees who have access to funds to make sure they’re aware of the risks and what is at stake.
Cryptocurrency asset management offers a solution for many of these entry-level headaches. Comparable to asset management in the traditional finance space, cryptocurrency asset managers help institutions and HNW individuals keep track of their portfolios using one single platform that offers access to all of their accounts and wallets.
Cryptocurrency asset management firms can also offer expertise and guidance to find reputable providers and ensure fund security. Some even also offer custodial services, eliminating the headache for institutions looking for security solutions.
Beyond the teething problems, even once up and running, newcomers to the space often encounter day-to-day challenges with managing a crypto portfolio.
For instance, incorporating crypto assets into everyday accounting and bookkeeping practices can be difficult if existing systems aren’t set up to handle them. For international firms operating across multiple countries, there may be different tax treatment for types of transactions. The U.S. Internal Revenue Service levies capital gains tax on profits from trading cryptocurrencies, meaning that there’s also a deductible for losses. However, some countries, including Singapore, Switzerland, and Germany, don’t even charge taxes on gains, although there are often reporting requirements.
Such considerations are likely to have a bearing on trading and investment decisions as they could make the difference between profit and loss. However, they also impose a regulatory obligation on those holding or investing in cryptocurrencies that may differ from what’s required for non-crypto portfolio assets.
Furthermore, regulators may also require that cryptocurrency assets are included as part of a company’s audit.
Once again, cryptocurrency asset management firms can assist with much of this. Global asset managers will be familiar with the tax rules for different jurisdictions and may offer tools for modeling particular investment scenarios and their tax implications, helping to make informed decisions that maximize profit and offset losses.
A Still Young, But Maturing Ecosystem
Despite the wild west moniker, cryptocurrency has entered a new phase of maturity, thanks in part to the entry of institutions and other large players into the space. In turn, the participation of more sophisticated financial firms is driving the availability of services like asset management that replicate capital management practices of other asset classes and help companies to navigate this burgeoning asset class.
Overall, we’re undoubtedly observing a positive financial feedback loop, as the crypto markets are booming as a result of the significant uptick in demand from institutions, which serves to draw in yet more new investors.