Steady legitimization of crypto makes it a portfolio consideration

Cryptocurrency, once niche and mysterious, is becoming so big and mainstream that it is impossible to ignore from an investment perspective, says Jack Manley, executive director, global market strategist with JP Morgan Asset Management.

“I have a very hard time imagining that it’s going to go away any time soon. And for that reason, I think we have to at least consider it as a component of asset allocation,” he said on the latest episode of Soundbites.

But that investment need not be restricted to the cryptocurrency tokens themselves. Manley said there are opportunities to be found in a wide range of underlying technologies and among the main beneficiaries of the crypto movement.

He believes the value of cryptocurrencies has been going up recently for a number of reasons. Among them:

• It is becoming more institutionalized (as evidenced by the fact that bitcoin’s largest trading venue is now the Chicago Mercantile Exchange);
• It is becoming more accessible to investors (witness the launch of a number of very high-profile bitcoin ETFs);
• The crypto machine is self-feeding, in that valuation spikes tend to attract attention, which attracts more investors, which propels the price even higher; and most notably,
• There has been a shift in the regulatory environment under the new U.S. presidential administration.

Manley pointed out that regulations governing cryptocurrency have been “haphazardly cobbled together” over the last decade.

“There isn’t really a unified framework for thinking about cryptocurrency from a regulatory perspective,” he said.

For example, cryptocurrency can be bought and sold like an asset, which suggests certain tax implications. But it can also earned or created, with very different tax implications.

“We’re talking about the same token getting taxed in two distinct different ways. I think it’s a really good example of how this regulatory environment can be somewhat confusing,” he said. “And confusion always leads to the barriers to entry.”

But structure is coming, he said, thanks to a U.S. President sympathetic to cryptocurrencies, and a new SEC chairman moving to create “a comprehensive regulatory program that fully embraces all aspects of cryptocurrency.”

Manley said one of the biggest investment opportunities in the crypto universe is the underlying blockchain technology, described as an online database that stores information.

“You sell your house, you sell some art, you sell your car, you sell the stocks in your portfolio, all of these things can be registered and tracked with a blockchain, more securely than what we have right now, more quickly than what we have right now,” he said. “You can invest by buying the token that is associated with that blockchain. You can also invest by buying the securities of companies that are investing in blockchain.”

That includes banks and mass retailers.

“If you see blockchain as a way to increase efficiency and improve profitability, maybe you want to buy that company because it’s going to make you more money,” he said.

It remains, however, a new technology with a future that can go in many different directions.

“The bottom line for investing in crypto is that you cannot ignore it,” he said. “But if you do decide to incorporate it into your portfolio, you need to know exactly what you’re owning, and you need to have an iron stomach.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.