Cryptocurrencies as a New Asset Class

Under the pseudonym of “Satoshi Nakamoto”, a group of IT and finance professionals revolutionised the global investment universe in 2008 by inventing the first fully functional and secure digital currency; the concept of Bitcoin was born.

Less than 10 years later, the original underlying technology of Bitcoin, Blockchain, has evolved globally from an idea to a widely adopted and viable investment asset.

Blockchain and Bitcoin

Blockchain has grown and gained recognition as “an internet for assets and contracts”, and more than 700 different cryptocurrencies have been issued and actively traded to this day. Virtual assets today are an entire asset class within the area of alternative investments alongside commodities, hedge funds, and real estate.

The success of blockchain technology owes to the open-source nature of Bitcoin, as its source-code is publicly available at github.com and a free software license allows further development. The acceptance of Bitcoins as a store of value and payment instrument is attributed to a) the lack of a central authority (no risk of politically motivated devaluation) and b) the fast growing community using and trading Bitcoins (network effect). Computer engineers can copy, modify and experiment with the Bitcoin concept, thereby creating a wide array of alternative cryptocurrencies (altcoins).

Altcoins and ICOs

Altcoins are blockchain-based cryptocurrencies other than Bitcoin. Cryptocurrency traders globally have used the altcoin growth to invest in an alternative asset, free from government intervention, or to speculate on the volatility of these cryptocurrencies. The creation of some altcoins contributed to significant improvements in the development of digital currencies as a whole, such as Ethereum, Ripple, Dash, Litecoin, and others. For example, Ethereum is a blockchain that introduces a Turing-complete scripting language allowing for the creation of smart contracts; ZCash allows for the anonymity of blockchain transactions. On the other hand, there are altcoin developers who have executed scams via what is known as Initial Coin Offerings (ICOs), with the creators disappearing after crowdsourcing funds from the community. An example of an Initial Coin Offering scam is that of Edgecoin, where the organisers changed their initial ICO announcement to one claiming that the service has experienced a security breach. As a result, and as with every new asset class, rigorous due diligence is required when investing in cryptocurrencies. That’s why Herald Funds only focuses on the “blue chips” of all cryptocurrencies.

Fraud and Regulation

The presence of fraudsters does not imply a fundamental weakness in the asset class; it stems from sudden growth in the early stages of a new market and from the presence of many inexperienced participants. After all, in the early days when the first joint-stock corporations publicly listed their shares, stock scams were widespread, and even physical currencies are plagued by counterfeiting to this day. Yet it is difficult for one to imagine a financial portfolio that excludes stocks and fiat currencies. With that being said it is important to note that Bitcoin has never been the subject of a widespread security breach, forgery or counterfeiting and could potentially be considered the safest currency to this day.

A New Asset Class Here to Stay

Early stage setbacks should not ignore the fact that cryptocurrencies are a new asset class that is here to stay. Cryptographic claims are based on a strong, highly competitive and remarkably resilient technology: the blockchain. As the economy is becoming increasingly digitalised, the role of digital assets in investment activities is also bound to grow. Including digital assets in a well-diversified investment portfolio is, therefore, becoming an industry standard.