Cryptocurrencies have had a tough year, facing harsh criticism after failing to live up to their billing as an inflation hedge and instead crashing in value.
Market leader Bitcoin fell below €20,000 per token at the time of writing, after reaching a peak of close to €55,000 in November 2021.
But recent research commissioned by WisdomTree, which launched three crypto exchange-traded products last year, found that more than a quarter of UK adults aged 18 to 30 were invested in the asset class – a level similar to those who had put money into ISAs for stocks and shares.
In the first of a two-part series, Citywire selector spoke to Jason Guthrie, head of digital assets at WisdomTree, and Ha Duong, crypto specialist at BIT Capital, to ask them why younger people might have a greater affinity for the asset class and whether it’s expanding outside the UK.
A generational thing?
Guthrie (pictured) said the technological aspect of crypto was an attraction for younger people, but there were other selling points.
“Younger people are coming to invest their money in things they feel they have a connection with. That’s the technology side, but there’s also a bigger promise of what crypto can deliver.
“It’s the libertarian side of bitcoin that resonates with some people — the idea that this is naturally available and you can essentially get a lot more control over it.
“There is also talk of creating a more inclusive system for financial services. From a social perspective that resonates.
“The idea of disintermediating large parts of the established system for financial services. The anti-Wall Street sentiment has been hanging around since 2008 and is definitely part of the community element of the broader crypto movement.
Guthrie said the real attraction of crypto was its eventual evolution into a more stable system, rather than its anti-establishment credentials.
“The idea of a cheaper, more efficient, more digital-first financial services system that can be built around blockchain and decentralized finance and is something that just works better for you is more the sentiment that resonates with people.
“People want to see it grow into a stable technology and asset class. It’s going to take time, but most people who invest in it realize that it’s new technology. That’s why people are happy to invest despite the volatility.’
Financing the fringes
Duong, who runs two crypto-focused funds at BIT Capital, said the asset class can offer funding to people who might otherwise be excluded.
“Certain social groups may not have the same access to financial services as you and I do, where it is, for example, very difficult to access a margin loan product.
“This is especially the generation that grew up with computers and the internet. Knowing that they can get different types of information and products online, they will find it very natural to also get a margin loan from their computer, instead of going to a main bank.
Duong told Citywire selector, as with other volatile asset classes, crypto was also more suitable for younger investors. “People who still have a long time until they reach retirement can take more risk on their asset portfolio.
“If I was 60 years old, I would probably want to invest in fixed income. If I’m 40, I might have a higher stock mix. If I’m 25, I can fool around with crypto as part of my portfolio.’
Still in beta stage
Both Guthrie and Duong drew parallels between cryptocurrencies and the Internet in terms of technological development and maturity.
“The birth of the Internet was in 1994. Before that, the IT sector didn’t exist as a sector of the stock market, and it’s gone more than 30% over a 30-year period,” Guthrie said.
“Crypto adoption has followed a similar trajectory and it feels like right now we’re around 1998/99 in terms of where the internet was. It won’t move in exactly the same way, of course.’
Duong said he saw crypto as similar to a tech startup that had gone public at a very early stage.
“It has risk capital as a return, but with public market liquidity. You invest in startups, they are very volatile and they have a very high probability of failure, but do not have a daily or hourly price chart.
“If you were to map the probability of success for the average startup, and were to give it a daily price, it would be as volatile or more volatile than crypto. Both ethereum and bitcoin still consider themselves in the beta stage, not the alpha stage, of development.’
He said he hoped crypto would mature as a technology over the next two decades.
“If you asked people in 1995 about a potential time frame for Internet applications, it would also be difficult. Would you look at things like Amazon and pets.com, or other wave things, like Airbnb and Uber, that took another ten years to form?
“It’s still too early to think about all the potential that could come out of this. We’re at a stage where we’re trying to build existing products and value propositions that already exist in Web 2.0, in a Web 3.0 way.
“We’ve already seen billions of market capitalization transacted for a certain small number of early adopters, but in the context of 8 billion people globally, it’s still very early days.”
Different tokens, different uses
Duong said different coins have different uses, which is a key point for investors to understand.
“If you look at bitcoin, people tend to think of it more as a digital gold, whereas if you talk about ethereum, people tend to think more like a decentralized version of Amazon’s AWS or Microsoft Azure’s cloud platforms.
“If you think about these two value propositions, you have to value them very differently,” he said.
He said this year had raised big questions about whether bitcoin would live up to its billing as a digital safe haven of wealth, like gold.
“People ask what exactly is the intrinsic value of bitcoin? It is the same argument as with gold. Although gold has some industrial value and as jewelry, most of its value comes from its potential cash prize as a store of value, he said.
“In terms of bitcoin’s value as a potential inflation hedge, we saw this year that this narrative has not worked very well.
“But we still have to remind ourselves that it’s something that’s only lived for a little over ten years. To assume that it can compete with something that has been in use for millennia is very difficult.’
