T Rowe Price Says Take Cryptos "Seriously," Not Yet Portfolio Holding

Editorial Staff, August 9, 2021


Cryptocurrencies such as bitcoin have benefited from worries that state fiat currencies are being devalued by massive central bank quantitative easing amid COVID-19, as well as such activity since the 2008 financial crisis

T Rowe Price, one of the world’s largest asset managers with $1.62 trillion in client assets, says the global market for digital assets such as bitcoin is large enough - about $1 trillion - for the field to be taken seriously although it doesn’t yet hold these assets itself.

The US firm weighed in with thoughts about digital assets, aka crypto-assets, at a time when a number of major financial institutions such as BNY Mellon, JP Morgan, Morgan Stanley and Goldman Sachs, among others, have entered the space. To an extent, digital assets have gone “mainstream,” even though the regulatory picture is unsettled. 

“Whether cryptocurrencies have any inherent value is something we are still debating internally, as is whether we could bring the strength of our global investment research team to bear on any analysis of that value,” Robert Sharps, president, head of investments and group CIO, Sébastien Page, head of global multi-asset at T Rowe Price, said. 

Cryptocurrencies such as bitcoin have benefited from worries that state fiat currencies are being devalued by massive central bank quantitative easing amid COVID-19, as well as such activity since the 2008 financial crisis. Digital assets also benefit from perceived security and the speed of the underlying distributed ledger technology called blockchain.

“We don’t hold cryptocurrency in our portfolios. We’ve studied the risk and return characteristics and portfolio implications of cryptocurrencies. The mandates we manage for clients do not currently appear well suited for investing in cryptocurrencies, especially given the extraordinary level of speculation and volatility in many crypto markets. Nonetheless, crypto has an impact across capital markets, and our research in this space will continue to intensify,” Page said in a note. 

“We continue to discuss whether crypto currencies might eventually have a place in select portfolios and for a limited set of investors. While this debate will continue, we all agree that we are witnessing the developing stages of a transformative technology,” Page continued.

While cryptocurrencies will not supplant traditional currencies in most retail transactions, particularly in developed markets, trust in centralized currencies is eroding in many emerging markets and rising inflation is stoking interest in the digital assets area. Worries about financial privacy and a desire to break free from government control is also driving interest in the space. 

Government actions
In the US, the head of the Securities and Exchange Commission, chairman Gary Gensler said last week that it will regulate cryptocurrency markets to the maximum extent possible using its existing authority. He also urged Congress to grant the agency more scope and resources to oversee the sector. Gensler said the asset class was rife with “fraud, scams and abuse.” 

Approaches to bitcoin vary widely around the world. For example, in Switzerland, the country’s tax laws have not made any specific provisions for cryptocurrency, unlike some of our neighboring countries, such as France. In Germany, bitcoin is considered a “unit of account” and its citizens are free to trade it as they wish (source: Investopedia). Bitcoin is taxable in Germany and must incur valued added tax when it is traded with euros. Asian countries’ treatment of cryptos varies widely. Japan is relatively friendly to these entities, and bitcoin has been recognized as a legal means of payment but as a traditional currency. China has been an early adopter of blockchain, although the world’s second-largest economy has banned bitcoin mining, citing the environmental costs as a factor. 

Pros and cons
T Rowe Price said government scrutiny of cryptos was both a curse and blessing. 

“Governments’ choosing to strictly regulate or even ban cryptocurrencies outright poses a risk to current investors, but clarity about regulations could also invite opportunities. Properly regulated cryptocurrencies could become less volatile and more environmentally sound. Recent ransomware attacks demanding payments in cryptocurrency are highlighting the issue for regulators,” Page said in his note. “Meanwhile, many central banks are also exploring developing their own digital currencies. Central bank digital currencies may carry none of the privacy benefits of their counterparts, but they promise to promote financial inclusion - likely allowing the `unbanked’ to conduct transactions using a smartphone or a digital card.”

“There are already some 1,000 different currencies in circulation, and a shakeout is likely inevitable, especially as we see the speculation in cryptocurrency investing as one sign of increasing speculation in markets. Yet, just as the implosion of prominent early dot.coms didn’t doom the internet, the potential demise of any prominent digital tokens may not doom cryptocurrency. We expect the landscape to take years to unfold, and we are aware that the technologies and tokens that dominate the future may not even yet exist. Indeed, we find the growing diversity of cryptocurrencies as intriguing as opportunities in any single coin,” Page said. 

Page concluded: “We are keeping an eye on alternative methods for ensuring chain integrity and how these may favor competing currencies. At the same time, as one of our experienced technology portfolio managers points out, there are significant network effects in crypto, as elsewhere in the digital world. Identifying the strongest systems will be key. We expect there to be an investing opportunity for active managers who can better understand the longer-term viability of certain currencies.”

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