24 Oct 2018
Despite storing over fifteen billion dollars in value, bitcoin still generates confusion around its classification as an asset. The Commodity Futures Trading Commission (CFTC) asserts that it is a commodity; the Internal Revenue Service (IRS) deems it property; and the U.S. Securities and Exchange Commission (SEC) has decided to approach it on a case-by-case basis.
The term cryptocurrency jumbles the regulatory situation. It implies cryptocurrencies are a subgroup of the currency asset class, which from our point of view is not the case.
If we take a look at the definition of an asset class, addressed by Robert Greer’s seminal paper “What is an Asset Class, anyway?”, Greer defines an asset class as “a set of assets that bear some fundamental economic similarities to each other, and that have characteristics that make them distinct from other assets that are not part of that class.” He further goes on to lay out three ‘super classes’ of assets: capital assets where there will be some kind of on-going return or production of value. Equities, bonds, and incoming-producing real estate are all examples; consumable or transformable assets are commodities like oil and gold. These assets can be traded or used, and they retain their value; and store of value assets which do not generate returns and can’t be consumed. These assets, such as gold and fine art, are stable places to store wealth (and in some instances are more portable and liquid than the other asset classes).
The problem is “the lines between asset classes can still be fuzzy”. For example, gold fulfils both consumable/transformable as well as store value assets. If we look at bitcoin through Greer’s ‘super class’ assets, it exhibits characteristics of all three asset classes while also adding other emerging benefits, such as micropayments and the execution of smart contracts. By comparing cryptocurrencies to traditional ‘super’ assets, it’s clear to see that they have a lot of potential as assets; and as cryptocurrency evolves, it will further differentiate itself from other asset classes.
In continuation, you must also consider what people are choosing to invest their money in. If we look back at previous generations, we can see that each generation has favoured dramatically diverse asset classes. The silent generation of 1926-45 favoured gold; the baby boomers were purchasing equities; and Generation X seemingly liked Hedge Funds. As for millennials, they are heading into their “prime saving” flow in the coming years and interestingly the rise of Bitcoin has coincided with this. Millennials are choosing to invest their money into Bitcoin and other emerging cryptoassets. It looks like they have been bitten by the Bitcoin Bug! For every $1bn of cryptoassets today, we see an approximate price appreciation of $25bn. Imagine, if millennials put 10% of their savings flow annually into crypto ($100bn), that’s a 2.5trn rise each year. By the end of this generational peak, the price per Bitcoin could be as high as $10,000,000. A digital and decentralized asset, with a fixed supply that utilises cryptography to operate a distributed ledger, may well be the next major investment of millennials and could potentially be seen as a digital store of value over the longer term.
In our opinion, along with many others such as Coinbase and ARK, Bitcoin is the first of its kind and is rapidly becoming a distinct asset class in itself. The Federal Reserve stated in their Short Introduction to the world of Cryptocurrencies paper that “bitcoin has a wide range of interesting applications and that cryptoassets are suited to become an important asset class.”