Council Post: How Cryptocurrency Can Take On Traditional Funds
(Source: forbes.com)

clicks | 14 days ago | comments: discuss | tags: cryptocurrency


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(Original link: forbes.com)

Having emerged in just the last decade , cryptocurrency is still seen as a nascent experiment by most, rather than a legitimate contender in the world of high finance. After all, stock exchanges have been around since the 1600s , while investment funds have existed since the 1700s . The global stock market today is worth a mind-boggling $68 trillion, according to The World Bank . Given these figures, it's easy to discount the relevance of cryptocurrencies, which collectively have a market cap of around $200 billion . However, I believe cryptocurrency deserves a serious look by financial professionals, lest they fall into the same complacency trap that led to the death of companies like Blockbuster.
In spite of the millions of articles and countless forums out there on how to succeed as a business, it all comes down to one thing: providing the best product. Consumers are always looking for what's cheaper, faster, flashier or in some way better than the competition.
When it comes to finding an asset manager or investment fund, consumers are no different. They prefer companies that instill trust and, more specifically, are looking for things like liquidity, variety in fund types, innovation and low investment minimums.
In the case of funds, trust largely comes down to transparency. Can you, as an investor, verify the fund holdings and interactions with the fund in real time? Traditional funds, whether it's Vanguard or BlackRock, don't offer this level of insight. However, some blockchain-based investment specialists are able to do so, given that transparency is one of the core tenets of blockchain.
On a practical level, investors in some blockchain-based funds can view a smart contract of the fund. A smart contract , essentially, is code that executes itself on the blockchain. Because this code is on the blockchain, it's visible to everyone. There is no central controller or gatekeeper limiting its visibility.
While transparency alone is probably not enough to pull investors away from long-standing funds like BlackRock, there are other benefits to crypto funds. Another major benefit to crypto funds is liquidity. Indeed, even the U.S. Securities and Exchange Commission (SEC) acknowledges the lack of liquidity in the secondary market. On a related note, the SEC’s commissioner at the time also noted the need for transparency.
Liquidity refers to the "transferability" of an asset, or, more simply, how easy it is to buy and sell the asset. If there are no buyers and sellers available, you're stuck with the asset. Crypto funds can enable investors to trade directly with the fund manager, without needing to utilize an exchange, providing added liquidity. By redeeming their share of a fund from the fund managers themselves, investors achieve near-immediate liquidity.
Beyond transparency and liquidity, crypto funds are uncorrelated to traditional funds. This is important because portfolio diversification is one of the most basic and crucial aspects of responsible investing. If you put all your eggs in one basket, a Black Swan event like a recession could destroy your whole portfolio.
Indeed, a Fidelity report on institutional investments in digital assets found that nearly half of institutional investors surveyed found digital assets' low correlation to be a highly appealing characteristic. Similarly, nearly half of the respondents appreciated the innovative play of digital assets. Naturally, the innovation and low correlation of crypto funds go hand in hand, as these assets are in a minority that won't be as affected by traditional market trends.
Ultimately, crypto funds won't be replacing traditional funds in 2020, or likely even in the next decade, given the long-standing history of traditional funds and the massive assets they hold under management. However, in the long run, I believe crypto funds have the potential to become serious contenders on a global scale....