Blockchain means we have already passed ‘peak fund’ – Professional Investor

Bitcoin’s price collapse will bring satisfied smiles from skeptics. They can congratulate themselves for getting their valuations right, at least for now.

They are right that arrogance is a danger; history has done it many times. But the birth of cryptocurrencies and their unprecedented rise to popularity raises a further point to consider: is the investment industry failing to make a case for traditional investments? Are we missing a trick?

Untested, unregulated and highly volatile

Around 300 million people hold crypto, industry estimates suggest. In emerging markets, crypto ownership often exceeds stock ownership; availability is a decisive factor. These dramatic numbers reflect what we are seeing everyday life – the conversations in pubs, on social media or in the back of taxis. Many people have been inspired to buy into an unproven, unregulated, highly volatile new asset. This has proved disastrous for some, especially those who bought at the peak.

If crypto and digital assets can sell themselves so well, despite these obvious drawbacks, there are lessons for asset managers. Ironically, it is blockchain, the technology that underpins cryptocurrencies, that could be the catalyst for change for the traditional investment industry. In fact, that’s probably why we’ve already passed the “peak fund”; in the decades ahead, new types of tailored investment products may become more common than the mutual funds and open-end investment companies (OEIC) that dominate today.

Blockchain technology will help provide access to more exciting, more tangible assets. A new type of asset management company with broad expertise will make it easy to invest in the world around us. A shopping mall, for example, can be cut up and pieces of it sold to local investors, perhaps their own buyers. Ledger technology will record ownership and effectively create a trading platform. Buying and selling is simple and clear, and the asset is tangible. It can be mixed as part of a portfolio to ensure some diversification and to achieve the best result for the investor.

Increased demand for disruptive technology

Tangibility is the key and a connection with the underlying investments. The popularity of crowdfunding over an extended period and the demand for disruptive technology stocks during successive shutdowns has demonstrated this. Investors want to know the history of their investments and ensure they align with their own values. They want their portfolios to be personal to them. Using blockchain technology can help this journey.

The traditional investment world will also reap the benefit of incorporating blockchain technologies. The efficiency of back office operations may change. One-click transfer of assets is preferable to the current 17-step trading process.

Investors should reap the benefits of this democratization wave; possessions once out of reach become symbolized and easily accessible and affordable.

The rise of the digital wallet

In the not-too-distant future, investors are likely to hold more of their investments in their digital wallet than they do in mutual funds. This could become a reality in my career.

The need for asset managers who actively manage investments will grow in this democratized world. The abundance of new investment options must be examined to assess their potential and their impact. Portfolios must be balanced and structured to meet the owners’ objectives.

The question is whether the industry can embrace this challenge. Not all companies are ready for the journey, and some will not take the course. Those that already bring together public and private markets on their platforms will be best placed.

The key is to make strong connections with those already immersed in the world of cryptocurrencies. The crypto industry is at a similar stage to the hedge fund industry 20 or 30 years ago. Although still unruly, some platforms are trying to use the extreme volatility to try to offer more predictable returns.

Many, many investors have turned to crypto. Others have chosen to crowdfund companies they believe in. The industry can meet this need for personalization and broad choice by embracing blockchain, and by being open to the ways new asset classes can work in portfolios. If we fail in this goal, even more investors will be lured away to whatever tomorrow’s unorthodox and unproven investments may be.

A version of this article originally appeared in the FT on 20 July 2022.