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Cryptocurrency column: The key to investor confidence in Cryptocurrencies

Cryptocurrency markets plummeted this week with the market capital of the entire cryptocurrency market falling below $200 billion USD for the first time this year. This comes off the back of a barren 6 months for the cryptocurrency market which has seen that market capital more than halve in that time, a far cry from the stratospheric heights it reached at the end of 2017.

Much of the recent negative market sentiment has been attributed to persistent reluctance by the US Securities & Exchange Commission to approve a Bitcoin Exchange Traded Fund (ETF) with the most recent decision by the SEC to delay a decision expected this week to the end of September sparking the current market dip.

While the market has reacted to this news as expected, with a loss of confidence and a reflection in price, the positives for the industry have been lost in the gloom; that the decision has been merely delayed, not rejected. Whilst this may appear on the surface like a desperate attempt to spot a silver lining on a looming storm-cloud, many within the industry are barely surprised.

The regulatory community has consistently displayed a very cautious attitude to an asset class which it is still debating on how exactly to classify with different countries, different states within a country and even different regulatory bodies within a state classing it as a security, a commodity or a currency. The lack of consensus even on taxonomy should point to just how in its infancy this asset class is, at least with regards to public and regulatory perception. As such, a move that could be viewed as ratifying mainstream adoption does seem incongruous.

Somewhat ironically, one of the primary benefits that an ETF would have brought to the investing landscape would be greater security. One of the impediments towards institutional investment in Cryptocurrencies has been concerns around the safety of investments of such a magnitude. Historical susceptibility of exchanges and other relatively public repositories of Cryptocurrencies to hacks have highlighted the concerns around custodianship of such honeypots. An ETF would allow asset managers and investment funds, Cryptocurrency exposure without the principal-party risk of theft, removing a fundamental hurdle in the current landscape.

However, perhaps it worth questioning whether we are asking the right question.
Should the continued lack of regulatory support, from powers that we depend on for guidance but who continue to demonstrate both indecision and lack of cohesive understanding of this industry be the factor that continues to drive wariness?

As justified as cautious sentiment may be and while basic investing psychology may agree with this cause-effect, this does not appear to be the deeper question that begets the root answer. If security remains the primordial concern than therein we should seek the solution.
We may be better served looking at improved custodial solutions to increase assurance around security of assets held.

Another argument that has been mooted is that the answer lies not as much in improved custodianship as it does in improved education around utilisation and effective implementation of existing cold storage, multi-signature and smart contract solutions. After all, for every story of lost or hacked accounts, there are several orders of magnitude of untold stories of secure custodianship.
At this juncture it is worth noting that the underlying technology is robust and Bitcoin itself has never had a security breach; It is the exchanges that have been hacked and individuals who have opened themselves up to be scammed. Again, this points towards a emphasis on education and greater understanding.

A Bitcoin ETF will bring greater assurance to the mainstream investing population, it will help reduce volatility in the market and it will provide fund managers and financial advisors access to the market through a structured process; integral to adoption. Delays in regulatory approval are, understandably, adversely affecting market sentiment in the short term. The attention span of the Cryptocurrency market is very short though and it is worth reminding ourselves that we have made significant steps towards compliance for ETFs and most in the industry believe it is inevitable and a question of when, rather than if.

However, taking a longer-term perspective highlights the need for improvements in custodial services as well as greater education of the investing populace around safe storage and security practices to truly quash some of the core underlying concerns that perpetuate the uncertainty around this emerging market class.

Dr Prash P is the CEO of Caleb & Brown, a Cryptocurrency Brokerage who serve to bridge the gap between Cryptocurrencies and the financial services industry. They were awarded Fintech Startup of the Year 2018 by the Stockbroker and Financial Advisor’s Association

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Dr Prash P.

Dr Prash P.

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