L-R: Brendan Swift (Conexus Financial), Stuart Eliot and Robert Crossley. Photo: Jack Smith
Many asset owners are hesitant to invest fiduciary capital into cryptocurrencies due to their perceived volatility and uncertain fundamentals, but allocators who have bought into digital assets made the case that they could be an emerging store-of-value asset comparable to gold.
This is the thesis of the A$60 billion ($39 billion) AMP Super in Australia, which made a “small” allocation to Bitcoin futures last year via its dynamic asset allocation (DAA) program, which includes commodities.
The move, when publicly announced, was overwhelmingly supported by its members, according to the fund’s head of portfolio design and management Stuart Eliot.
“The phones in the superannuation contact centre rang off the hook. People were asking ‘which of your funds have Bitcoin in them, I want to move my superannuation there’. And ‘do you have a standalone Bitcoin option’, which we found quite interesting,” he told the Fiduciary Investors Symposium at Oxford University.
When assessed with common properties of a store-of-value asset, such as scarcity, durability, portability and liquidity, AMP Super’s analysis suggests Bitcoin fits into the definition better than gold or fiat money.
Store-of-value assets broadly have a role in the superannuation or pension context to maintain the real value of portfolio assets, hedge against monetary debasement and event risk, and improve portfolio returns and Sharpe ratio, Eliot argued.
“The thing that’s really holding asset allocators back [from investing in store-of-value assets] is the lack of a capital market forecasting framework, for gold in particular,” he said.
When trading Bitcoins in its DAA program, AMP Super worked with signals including price momentum, investor sentiment, and measures of liquidity and inflation.
“If you look at how both Bitcoin and gold have responded to inflation, particularly since 2020, it’s not actually the level [that matters], it’s rather the change. If consumer measures of inflation expectations change or realised inflation is increased, that tends to be positive for the price of these assets,” he said.
More recently, the fund started exploring on-chain analytics, which examines public blockchain information such as transaction patterns to determine cryptocurrencies’ potential price movements.
“You can actually see the price at which every unit of Bitcoin last moved and compare that to the current valuation, that turns out to give really good trading signals,” Eliot said.
Technology developments like cryptocurrency or tokenisation – which refers to the process of turning rights to financial assets into digital tokens on a blockchain – have significant investment implications. Robert Crossley, global head of industry and digital advisory services at Franklin Templeton, said assets of the future will be programmable and dominated by wallets instead of non-interoperable accounts.
“What all technology does, from steam power to blockchain, is it fundamentally changes the fixed and variable cost structure of the industry. New things become possible and previously impossible things become possible,” he said.
The UK is one of the latest countries looking to enable tokenisation in its asset management industry, with its Financial Conduct Authority giving the nod to a “direct to fund” model in a consultation paper in October, where end investors can directly buy into a fund, streamlining the investment process without the fund manager acting as a principal.
There are a lot of big concepts when it comes to digital assets, but Crossley said one concrete step allocators can take right now is educating internal teams and stakeholders.
“The dirty secret of this industry is we talk about tokenisation all the time, but what’s really happening in nearly every case is we’re creating duplication. We have the legal book of record that we reconcile the sort of on-chain ‘pretend book’ of record to at the end of the day, that’s why you can’t pay intraday interest,” he said.
“[Education helps to] be able to separate where there is material progress, and the technology is being used in a way that’s pushing things forward, and then from that, you start to understand the investment part of it. But don’t put the cart before the horse.
“The biggest risk that we all run collectively is really that the world is changing faster than we’re updating our beliefs about it.”
