ETMarkets Crypto Conclave: Is crypto to be considered seriously as an asset class? (2024)

ETConclave on cryptocurrencies finds out the recognition and definition of crypto as an asset class in conversation with Avinash Shekhar, the CEO of ZebPay and Joel John, the head of Ledger Prime. Crypto assets have long been called an asset class. An asset class is a financial instrument typically having similar financial characteristics. But does crypto fall in the category and if so how?

Crypto as an asset class

Avinash believes that crypto has all the attributes of an emerging asset class. The attributes include holding value across space and time for years and some legitimate use cases. He believes that the use cases of cryptocurrencies could be even bigger than the Internet which will come into the picture only in the further stages of the digital revolution. Another important trait of this asset class is volatility which is an inseparable trait of any growing asset class as has been the case earlier for oil too. He believes that the volatility of virtual assets would come down as it gets more firmly established. At the same time, he affirms that price volatility won't diminish due to the increasing financial literacy among crypto enthusiasts and a consequent rise in the crypto buyers and traders over the past 5 years. The Fear of Missing Out (FOMO) has also slid down from before and will continue to as the crypto users gain maturity.

However, Avinash does not see any relation between volatility and the decentralised character of cryptocurrencies. He stands strong by the quintessentially decentralised character of cryptocurrencies, where users exercise power and define rules which make crypto the most sought-after and unique asset class. He believes a truly decentralised system lessens the chances of manipulation and abuse. The newness of this asset class having a 24x7 trading regime also makes it an attractive option.

Joel too believes that the speculative nature of the asset comes from its nascent phase. However, he thinks that this decentralised asset has a self-regulated market as is evident from various countries like Dubai, U.S which have a clear set of regulations and even India is working steadily towards it.

Sumit Ghosh, Co-founder & CEO of Chingari says, "People have shown immense trust in cryptocurrencies in the last couple of years. One of the major things, why people are investing in crypto, is because people are looking for better returns. For example, Bitcoin's supply will never surpass 21 million, making it a desirable inflation-resistant store of value. When you consider Bitcoin's current market capitalization, which is over $ 850 billion, it is evident that it is on track to overtake global tech powerhouses like Microsoft in the near future. Because it has opened up new investment opportunities, it should be classified as an asset class."

How speculative is a crypto asset, and what kind of changes trigger the volatility?

Joel reasons it out with three arguments. Firstly, every novel technology goes through the phase of rapid speculation, whether it is shipping routes or the internet in the pursuit of growth and adventure. Secondly, crypto is looked upon with curiosity and as a source of viable income in India, where its access is being regulated. Thirdly, it could also be due to bitcoin mimicking the stocks and currencies. However, the continued speculation around cryptocurrencies in spite of the stronghold of bitcoin could be due to its perceived image as a gambling asset, raging hunt for economic opportunities and the widespread availability of the internet. All of this necessitates the financial literacy of the people.

Concentration of crypto assets in early investors can lead to price crashing if they liquidate their holdings
Joel believes that crypto assets are concentrated in the hands of early investors and have made them richer because they reaped rich dividends from the exponential increase of the price of cryptocurrencies in the consequent years. Their high-risk appetite also helped them to hold it for a long time. In such a scenario, the sale of a big crypto amount by these whales would slightly reflect in the market and as for the liquidity, it would get absorbed in the market rapidly.

The basis of classifying crypto as an asset class
Is crypto a peer-to-peer Electronic Cash System or a means to earn short-term gains or a new decentralised blockchain technology with use cases? Can it be classified as an asset class? Avinash calls crypto a great asset class where Bitcoin and Ethereum serve as a store of value and reservoir of use cases respectively. These will continue to grow and have reached their maturity. Bitcoin specifically has become an asset class due to people seeking long-term gains rather than speculative trading. The decentralised network cannot be missed either, which in itself is a revolutionising entity that may soon overtake social media and other platforms.

The idea of decentralisation and crypto as an asset class
Avinash underscored the fact that decentralised finance (DeFi) is an integral part of the crypto ecosystem and cryptos are needed for facilitating transactions on DeFi. For instance, in the DeFi Compound network, the compound token is a crypto token built on the blockchain of other cryptos. The other use cases of crypto NFTs, DeFi lending and borrowing, Dapps and other blockchain products that are different parts sprung from the same crypto ecosystem.

Can the mass adoption of crypto as an asset class take place worldwide?
The fastly-pacing growth of cryptos is indicative of further adoption but not without certain impediments. At the outset, Joel states that the first wave of change has already occurred. He substantiates the inevitable and imminent rapid expansion and adoption of cryptocurrencies by citing today's indispensable household items like fridge, television and internet which were also revolutionary, modern and against the current when they were invented. The massive adoption of crypto would mean a lot of crypto transactions without involving buying tokens and usage of crypto ATMs. It would entail much more and beyond it like the transformation of the communication technology and social media with metaverse, the games, Web 3.0, regional innovations. He believes the change would come within 2 years and will bring in a lot of younger crowds.

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Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions.