3 challenges shaping the future of cryptocurrencies

what you need to know

  • The emerging asset class faces challenges in the short, medium and long term, says Morningstar analyst Madeline Hume.
  • The biggest short-term concern is regulation.
  • In the long term, cryptocurrency is likely to integrate with established financial players, Hume predicts.

Predicting how the cryptocurrency industry will develop over the next decade may seem almost impossible, given the current crisis in the market. Crypto critics, enthusiasts and analysts offer a wide range of views on the nascent market, from dire forecasts to bets on a golden age.

“We are in the early innings of crypto and digital currencies, but we clearly see it as an important part and redefinition of the financial system,” PayPal CEO Dan Schulman said at a cryptocurrency conference last week, according to a report. report Fortune. “The next five to 10 years will bring massive changes.”

Madeline Hume, Senior Research Analyst at Morningstar, recently provided some context on the near, medium and long-term outlook for the industry.

Morningstar doesn’t rate digital assets, he noted, citing a dearth of academically grounded methodologies on how to value tokens. The research firm, however, scans the landscape to help investors understand the space.

Morningstar recommends extreme caution to any investor buying cryptocurrencies. Buying digital currencies is a way of interacting with the underlying technology, Hume told ThinkAdvisor. “Whether or not that translates into a strong investment case is still unclear at this point.”

The sweet spot would be to buy crypto to learn and experiment without expecting a huge return, he said, adding that investors should draw a clear line between crypto and traditional investments. “I would go so far as to say that it may not make sense to expect a return of cryptocurrencies at all – there are plenty of tokens out there that will go extinct and fail.”

For every potential step in the development of this emerging asset class, “I see a key obstacle or opportunity,” depending on how you look at it, Hume said.

Short Term: Regulation

The regulatory path for cryptocurrency remains one of significant uncertainty. The Securities and Exchange Commission, concerned about the lack of regulation of cryptocurrencies, has not yet allowed mutual funds or ETFs to invest directly in Bitcoin.

In Morningstar’s recent crypto landscape report, Hume and research analyst Jeremy Pagan cited “the absence of smart, measured regulation in cryptocurrencies (as) the key barrier to future adoption,” with 55% of users US-based financial advisors and 39% of institutional investors. globally citing regulation as a “key hurdle”.

Current solutions for investors interested in investing in cryptocurrencies, aside from directly purchasing the digital tokens, include mutual funds and ETFs that hold Bitcoin futures or invest in companies that hold Bitcoin. These products, however, “don’t track the asset class particularly well,” Hume told ThinkAdvisor.

(Investors can also gain exposure through private trusts, such as the Grayscale Bitcoin Trust, which directly owns Bitcoin.)

“We are seeing regulators taking notice and there are some within the digital asset native world who are actively calling for more regulation and oversight,” Hume said. He cited Sam Bankman-Fried, founder and CEO of cryptocurrency exchange FTX, as an example.

Smart regulation that protects consumers could ensure confidence in the crypto market and give it a boost, he added, “or it could eliminate it altogether, but I think that’s unlikely at this point.”

The fact that the SEC and the Commodity Futures Trading Commission have so far not stepped in to prevent the proliferation of these types of assets “means that they are willing to allow these types of technologies to develop and iterate” before taking drastic measures, according to Hume. . If these regulators wanted to nip it in the bud, he added, “they most likely would have already done so,” before allowing entrenched players and inflated ratings.

Hume was hesitant to speculate on the timing of crypto regulations. “It will come when regulators are ready to do it,” he said. “But I think it’s a consideration that will need to be resolved in the next three years if cryptocurrencies are going to establish themselves as a permanent fixture of our financial markets.”

Giving his own opinion rather than Morningstar’s formal position, Hume said he would like to see more protections for investors. Cryptocurrency buyers do not enjoy the same security measures as investors trading stocks and ETFs, such as a ban on insider trading, he said.

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