3 challenges in shaping the future of crypto
What you need to know
- The emerging asset class faces challenges in the short, medium and long term, says Morningstar analyst Madeline Hume.
- The biggest concern in the short term is regulation.
- In the long term, cryptocurrency will probably be integrated with established financial players, Hume predicts.
Predicting how the cryptocurrency industry will develop over the next decade may seem almost impossible, given the ongoing market breakdown. Cryptocritics, enthusiasts and analysts offer a wide range of views on the nascent market, from scary forecasts to games in a golden era.
“We are in the beginning of cryptocurrencies and digital currencies, but we clearly see it as a big part, and a redefinition of, the financial system,” PayPal CEO Dan Schulman said at a cryptocurrency conference last week, according to a report from Fortune. “The next five to ten years are going to bring massive changes.”
Madeline Hume, senior research analyst at Morningstar, recently provided some context on the near, medium and long-term outlook for the industry.
Morningstar does not value digital assets, she noted, citing a lack of academically substantiated methods for valuing tokens. However, the research firm explores the landscape to help investors understand the place.
Morningstar recommends great caution to any investor who buys cryptocurrency. Buying digital coins is one way to engage with the underlying technology, Hume told ThinkAdvisor. “Whether it means a good investment case or not is still unclear at this point.”
The sweet spot would be to buy cryptocurrency to learn and experiment without expecting great returns, she said, adding that investors should draw a clear line between apples and oranges between crypto and traditional investing. “I would go so far as to say that it may not make sense to expect returns from crypto at all – there are many tokens that will die out and fail.”
For each potential step in the development of this emerging asset class, “I see an important obstacle or opportunity,” depending on how one views the situation, Hume said.
Near term: Regulation
The regulatory path for cryptocurrency remains a significant uncertainty. The Securities and Exchange Commission, concerned about the lack of cryptocurrency regulation, has not yet allowed mutual funds or ETFs to invest directly in Bitcoin.
In Morningstar’s recent crypto-landscape report, Hume and research analyst Jeremy Pagan cited “the absence of smart, measured regulation in cryptocurrencies (as) the key barrier to future adoption”, with 55% of US-based financial advisers and 39% of institutional investors. globally, regulation is cited as a “key roadblock”.
Current solutions for investors interested in investing in cryptocurrencies, apart from buying the digital tokens directly, include mutual funds and ETFs that own Bitcoin futures or invest in companies that hold Bitcoin. These products “do not track asset class very well,” Hume told ThinkAdvisor.
(Investors can also gain exposure through private trusts, such as the Grayscale Bitcoin Trust, which directly holds Bitcoin.)
“We see regulators taking note, and there are some in the native digital asset world who are actively calling for more regulation and oversight,” Hume said. She cited Sam Bankman-Fried, founder and CEO of the FTX cryptocurrency exchange, as one example.
Smart regulation that protects consumers can secure confidence in the crypto market and give it a boost, she added, “or it can kill it completely, but I think at this point it’s unlikely.”
The fact that the SEC and the Commodity Futures Trading Commission have not stepped in now to prevent the proliferation of these types of assets “means they are willing to let these types of technologies evolve and repeat” before they strike, according to Hume. If these regulators wanted to take it to the bottom, she added, “they most likely would have done so already,” before allowing anchored players and balloon ratings.
Hume was hesitant to speculate on the timing of cryptocurrencies. “It will come when regulators are prepared to do so,” she said. “But I think it’s a consideration that needs to be addressed over the next three years or so if crypto is to cement itself as a permanent fixture of our financial markets.”
Hume gave her own view instead of Morningstar’s formal position, saying she wants to see more investor protection. Cryptocurrencies do not enjoy the same security measures as investors trading stocks and ETFs, such as a ban on insider trading, she said.
