Professional investors and wealth managers remain committed to opportunities among cryptocurrencies and digital assets, despite the regulator’s warnings against them.
The latest move from the Financial Conduct Authority (FCA) to enforce robust standards for crypto-related business came last week when it banned cryptocurrency exchange Binance from “all UK regulated activities”, leaving its UK customers unable to make any withdrawals in sterling.
The move has resulted in up to 90% of crypto businesses withdrawing their applications to register with the FCA under the temporary registration regime, according to Edinburgh-based crypto wallet Zumo.
In October 2020, the regulator banned the sale of cryptocurrency exchange-traded notes to retail investors – a move that has been widely criticised by industry figures as being “short-sighted” as the specialist asset class continues to gain popularity.
Increasing exposure
Research from Nickel Digital Asset Management among institutional investors and wealth managers across the UK, US, Germany, France and the UAE, found 82% of those that already have some exposure to cryptocurrencies and digital assets intend to increase it over the next two years.
“Many of those professional investors with holdings in cryptoassets are looking to increase their exposure and this is being driven by several factors including strong market performance during the Covid-19 crisis, more established investors and corporations endorsing the market, and the sector’s infrastructure and regulatory framework improving. These trends will continue to expand,” says Nickel Digital co-founder and CEO Anatoly Crachilov.
More than half of those said they would increase their allocation to take advantage of capital growth, while 38% said having some exposure to the assets has boosted their confidence within this market.
Meanwhile, a third said they thought the regulatory environment for the sector is improving.
Zumo chief executive Nick Jones says crypto businesses must accept that regulation is an important step to achieving mainstream adoption in the UK.
“From the UK consumer perspective, that means compliant UK-based solutions that can cater specifically to the needs of UK consumers and offer the level of security and consumer protection they have rightly come to expect,” he says.
“We’ve seen larger players moving their operations away from the UK to move beyond the FCA’s reach and we can only expect that trend to continue. This would seem to create risks for the UK consumer that there is no way for the regulators to provide a redress for. Presumably this is not planned to be the end state to provide proper customer protection.”
Research carried out by the FCA found that 2.3 million adults have money invested in crypto, with just over a third considering their investment to be of high risk or a gamble. Only 11% said that they had regrets about making an investment in cryptocurrencies, while more than half of those with a holding said they would buy more.
“For investors it’s important to bear in mind that the payments world is in a state of flux, and the rules of the future game have not yet been drawn up,” says Hargreaves Lansdown senior investment and markets analyst Susannah Streeter (pictured).
“Although it’s clear that cryptocurrencies in some form will find a place at the table in the financial system, given the interest by large companies and governments, it’s very unclear which of the thousands of coins and tokens will retain their value in the future and what role they will play.”
Inflation driving demand
According to Nickel Digital’s analysis, 19 listed companies had roughly $6.5bn (£4.7bn) invested in bitcoin in June 2020, while $43.2bn worth of the cryptocurrency is held through bitcoin closed-ended trusts and exchange-traded products.
An FJP Investment survey of investors with a minimum portfolio of £20,000, excluding primary property, general savings and pensions, found that 13% have plans to allocate a portion of their portfolio to bitcoin over the next 12 months, rising to almost a third among the younger age groups (18 to 34-year-olds).
DeVere Group chief executive and founder Nigel Green says: “It’s our experience that investors are not in crypto to make a quick buck. They’re in it as a longer-term, future-first investment to create and build wealth.
“Millennials – who are beneficiaries of the largest-ever generational transfer of wealth, predicted to be more than $60trn from baby boomers to millennials over the next three decades – have grown up on technology. They are digital natives. Cryptocurrencies are, by their very nature, tech driven.”
He adds that inflation, alongside regulation and demographics, is a major factor driving investors into cryptocurrencies.
“There are legitimate and growing concerns about inflation as economies re-open and pent-up demand is unleashed by households, businesses and entire industries but is met with supply shortages,” Green says.
“Bitcoin is widely regarded as a shield against inflation mainly because of its limited supply, which is not influenced by its price.”
