The coming 12 months could finally, mark the year of crypto. We’ve been here before, of course. Ever since Bitcoin was launched in 2009 there have been claims that digital currency was poised to enter the mainstream. It has never happened, for a variety of reasons.
Crypto is a haven for money launderers; it’s far too volatile to attract institutional investors; it suffers from a lack of tangibility, it can’t be touched or felt; it consumes far too much energy – not a good look when we’re all supposed to be pushing towards net zero; it’s a fad, prone to speculators rushing in and getting burnt.
We’re going to do something great with crypto
Donald Trump
Slowly, frustratingly for some of its supporters in tech who want everything today and view waiting as anathema, but surely, those perceptions are being righted. Yes, Bitcoin attracts dodgy actors but they have a habit of being caught.
Not all. Enough though, to suggest that crypto does possess checks and balances – using the blockchain, for instance, creates a traceable digital footprint.
Wait, too. If we’re going down that road, does not traditional banking throw up a continuous stream of villains, often aided and abetted by the grand financial corporations and professional advisers who specialise in stashing cash beyond the reaches of the authorities? Yes, it does, and some.
Governments are proving more adept at cracking down on evidence of crypto crime, for an increasingly attractive reason: for hard-up officialdom there are serious profits to be made in confiscating Bitcoin. The US government is sitting on 198,000 repossessed Bitcoin, worth $20bn. China has a similar amount, while the UK holds 60,000.
It’s prone to rises and falls in price but, whisper it: shares can also go down as well as up. Writing in MoneyWeek, Charlie Morris from ByeTree, a research service for private investors, makes the point that "over the past year, Bitcoin has had an average volatility of 42 per cent, which is slightly higher than Rolls-Royce and slightly lower than Burberry".
Out of the shadows
Crypto, it’s true, does not have the same touchy-feely, measurable intrinsic quality as the historic standard keepsafe of gold. Central banks do not own underground, high-security vaults of Bitcoin. That, however, may be about to change. The incoming US president, Donald Trump, has declared his intention to store Bitcoin in a US strategic reserve, possibly alongside gold in Fort Knox.
This will mark a dramatic leap in how crypto is regarded, catapulting it from the shadows. Mr Trump, who knows about chasing value, who always has an eye on the prize, is pro-crypto. It was his election victory that drove Bitcoin to a record high of $108,000. He has pledged to end US official disdain for the currency, relaxing a tough regulatory regime.
To that end, he has nominated Paul Atkins, a crypto supporter, to run the Securities and Exchange Commission and appointed David Sacks, a venture capitalist, as his crypto and AI adviser. “We’re going to do something great with crypto,” said Mr Trump last week.
Setting up a US Strategic Reserve for Bitcoin signifies a major step forward. Other nations are bound to follow suit. In this respect, the UK needs to decide where it wants to be, and fast.
Rishi Sunak was a crypto advocate but he is no longer prime minister, and despite Mr Sunak’s declaration that he wanted the country to become a crypto hub, British financial regulators have so far had other ideas. Mr Sunak’s successor Keir Starmer does not share his passion.
Shift and prosper
The result is that the UK risks falling behind. The US and European markets, for instance, have embraced Bitcoin exchange-traded funds, or ETFs. They’ve had enormously successful product launches – the US iShares Bitcoin ETF holds $54bn worth of crypto, with the likes of Fidelity and 21Shares following suit.
In Europe, too, the market is booming, with Bitcoin ETFs from 21Shares, Fidelity, Invesco, HANetf, Van Eck and Wisdom Tree. But they remain closed to UK private investors. Absurdly, Bitcoin ETFs began listing on the London Stock Exchange in May this year, but they can be traded only by institutional investors.
That reluctance extends across the UK investment industry, which is dominated by conservative institutions. They struggle with the idea of absorbing crypto into their portfolios, seeing it as a definite "alternative" class of asset, along with art and other items that cause them to shudder because they do not conform to box-ticking metrics such as yield, book value and price/earnings ratios.
It reaches, too, into the usual mindset of operating. Institutions work five days a week, following usual stock market and banking opening and closing hours. Bitcoin is not like that; it rests for no one. Like the internet, its originator and vehicle of choice, digital is 24/7 every day. Quaintly, Britain still bases its public weekdays off on "bank holidays" – crypto does not do weekends and holidays. Period.
On the environment front, Bitcoin mining does require powerful chips and heavy electricity usage. But other activities are bad, if not a lot worse. Crypto receives a bad press in this respect, often from the same media that promotes air travel and cruises, and talks merrily of constructing more homes, hotels, tower blocks, transport infrastructure and factories. Journalists will wax lyrical about the needs of agriculture or advances in AI technology, without pausing to dwell upon how much energy they consume.
A shift is under way, one that could well be spearheaded by Trump’s America. Crypto is set to prosper in 2025.
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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