Cryptoassets and blockchain: An investor’s guide

New technologies have called forth new kinds of assets and databases that are gaining much attention worldwide. Four Wellington analysts outline key considerations for investors.

Key points

  • Cryptoassets, invented barely a decade ago, have exploded in visibility in recent years.
  • Individual investors, family offices, and small hedge funds have been the main investors in cryptoassets to date.
  • Participation by institutional investors has been limited so far by the newness of the asset class, its extreme volatility, a lack of regulation, and custodial, security, and liquidity concerns.
  • Many sell-side firms, retail-oriented investment managers, and tech giants have poured research into cryptoassets, while a number of startups are looking to capitalize on the lack of direct institutional liquidity through new exchanges.
  • The wisdom of investing in cryptoassets is hotly debated, but there is wide agreement that the underlying technology, blockchain, holds great promise across a range of industries.

ARE BITCOIN AND OTHER CRYPTOASSETS A REVOLUTIONARY INNOVATION, A BUBBLE READY TO POP, OR SOMETHING IN BETWEEN? Can such a new, strange, and volatile creature have a place in the portfolio of an institutional investor? Why all the excitement about the underlying technology, blockchain, and its potential to disrupt a range of industries? We address these questions in three sections: An educational Q&A, an exploration of blockchain, and considerations for investors.

The basics: Questions and answers

What are cryptoassets?

Cryptoassets or cryptocurrencies are software-generated units or tokens that rely on encryption and a technology known as “blockchain.” By enabling independent verification of fund transfers, blockchains let cryptocurrencies operate independently of central banks and financial institutions. In many currencies, such as bitcoin, units are created by a process called “mining,” in which computers solve difficult cryptographic problems and their owners are rewarded with currency units. This process can consume significant amounts of electricity. One researcher estimates that executing a single bitcoin transaction takes more energy than…

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