Cryptocracy has important lessons for asset managers

by Arthur · July 18, 2022

The author is the CEO of Schroders

Bitcoin’s price collapse will elicit happy smiles from skeptics. They can congratulate themselves for being entitled to the valuations, at least for the time being.

They are right that complacency is a danger – history has done it several times. But the birth and growth of popularity of cryptocurrencies raises a further point to consider: is the investment industry unable to argue for traditional investment? Are we missing a trick?

Around 300 million people have crypto assets, industry estimates from cypto.com suggest. And even after the sale this year, digital assets worth $ 1.1 billion are still in circulation.

These dramatic numbers reflect the conversations we witness every day, in pubs, on social media or in the back of taxis. Many people have been inspired to buy into an untested, unregulated, highly volatile new asset. This has proven disastrous for some, especially for those who bought at the top.

If, despite these obvious disadvantages, crypto- and digital assets can sell themselves so well, there is a lesson in the phenomenon of asset managers.

Ironically, it is blockchain, the technology that underpins cryptocurrencies, that can be the catalyst for change for the traditional investment industry. In fact, that’s probably why we’re already passed the “peak fund”. The signs are increasingly clear that the fund market will not be larger than it is now. Money is moved to personal portfolios, and this will only increase with ledger technology.

In the decades ahead, new types of tailor-made investment products may become more common than the equity funds and open investment companies that dominate today.

Blockchain technology will help provide access to 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 mall, for example, can be cut up and pieces of it sold to local investors, perhaps their own buyers.

Blockchain’s ledger technology will register ownership and effectively create a trading platform. Buying and selling is easy 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.

Tangibility is the key, as is the connection with the underlying investments. The demand for disruptive technology stocks during subsequent shutdowns has shown this, as has the popularity of crowdfunding over a long period of time. Investors want to know the history of their investments and ensure that they match their own values. They especially want their portfolios to be personal to them. Using blockchain technology can help this journey.

Ledger technology gives us much more. Our traditional back office business can see transformative improvements. One-click transfer of assets is preferable to the current multi-step, multi-day trading process required, for example.

Investors should reap the benefits of this wave of democratization. Assets when they are out of reach will be symbolized, easily accessible and affordable.

In the not-so-distant future, investors will probably keep more of their investments in their digital wallet than they do in mutual funds. This can 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 needs to be examined to assess their potential and impact. Portfolios must be balanced and structured to meet the owners’ goals.

The question is whether the industry can embrace this challenge. Not all companies are ready for the journey, and not all will succeed. Those who already gather public and private markets on their platforms will be best placed.

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

Many investors have turned to crypto. Others have chosen to crowdfund companies they believe in. The industry can meet this demand for personalization and wide range 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 into the next wave of unorthodox and untested investments.