PGIM, Inc. US-based Prudential Financial, Inc. Ltd. has a $1.4 trillion global asset management business.
Shahryar Antia, Vice President of Thematic Research at PGIM, spoke to Mint about the potential for revival in the crypto market, the potential of bitcoin as a currency and the effectiveness of crypto assets as a diversification tool. Edited excerpt:
The crypto market has recovered from every major crash in the past. Can it go back to its all-time high?
In the past, the price of the cryptocurrency fell and then rebounded sharply. There was no collateral damage and each rally inspired more confidence and optimism from investors. But the most recent crypto crash is spreading across the wider DeFi landscape, revealing vulnerabilities that we uncovered in our research, but are no longer hypothetical. The demise of TeraUSD, with some of the biggest lending sites (Celsius) and exchanges (Binance) essentially telling investors: “You can’t withdraw your money” is proof that the crash is seismic.
With more than $2 trillion wiped out since the high-water mark of 2021, many investors may be tempted to enter the cryptocurrency class at a potentially attractive, lower price point. However, the deepest risks for cryptocurrency investing may lie ahead.
Is inflation and rate hikes affecting crypto in the same way as stocks, or are there other fundamental factors behind the slowdown?
Certainly, the macro environment and risk-off sentiment influence cryptocurrency prices, but it is also important to remember that bitcoin has had spectacular crashes even during periods of low inflation and low rates.
The previous crash has been followed by a sharp rebound attracting new investors and increasing optimism in the space. While it may yet rebound, this latest crash in cryptocurrencies feels different. This time, the vulnerabilities are deeper and are rocking the entire system and are unlikely to boost confidence and optimism.
Can Cryptocurrencies Like Bitcoin Replace Fiat Currency?
Cryptocurrencies have yet to break into the realm of fiat currencies. Mostly because they do not meet the basic requirements of the currency. From cowrie shells to peppercorns and from silver coins to greens, money has taken different forms over the ages, but they all share three common characteristics: they act as stores of value. Huh; They are a widely accepted medium of exchange; And they are a unit of account. Unfortunately, no cryptocurrency to date adequately fulfills these essential functions of currency.
As central bank digital currencies (CBDCs) become more common, they present a potential threat to cryptocurrencies, particularly stablecoins, as they provide most of the benefits of crypto, but almost no liquidity or credit risk. Not there. And CBCD is not a distant prospect; China has already launched e-CNY, while the Reserve Bank of India, Bank of England and Banco Central do Brasil are very much ahead in research on this and some will launch their own CBDCs in the next year or two.
Any areas in the overall blockchain ecosystem that seem interesting from an investment perspective?
These are very early days, similar to the late 90s phase of the Internet boom, but long-term investors should focus on real-world applications of distributed ledger technology. These ventures are likely to generate attractive risk-adjusted returns – even if the crypto-mania itself fails. We are particularly interested in the use of private blockchains and smart contracts in financial services, which provide better efficiency in the clearing and settlement of securities. Tokenization, where ownership of real assets is divided into digital tokens on a distributed ledger, is also an important place for monitoring. For example, used in the real estate sector, it can substantially reduce frictional costs from transactions and servicing.
Are Cryptocurrencies an Effective Portfolio Diversifier?
No, cryptocurrencies are not effective portfolio diversifiers. They certainly haven’t provided stability to a portfolio in the equity turmoil of the past three months.
In its early days, bitcoin had little to do with broad equities and commodities, providing the potential for true portfolio diversification. However, as crypto investments become more mainstream, and especially since 2020, bitcoin’s correlation with US equities and commodities has grown exponentially and remains consistently high.
Will the risk profile of cryptocurrencies improve or worsen going forward?
The risk profile of cryptocurrencies as a long-term investment is terrible. Despite a lot of volatility, its risk-adjusted returns are quite pedestrian and virtually on par with equities and bonds since 2018. Furthermore, there remain several fundamental risks in the crypto ecosystem due to the lack of transparency and regulatory oversight. Without significant efforts to address this lack of transparency and accountability, coupled with strong momentum-driven outflows, it is hard to imagine how the risk profile of cryptocurrency investments improves going forward.