Crypto in the shade as ledger technology applications take centre stage: Invesco

Cryptocurrencies may take up most of the headlines, Invesco says, but the real investment potential lies in the technology and the trading platforms behind them – despite the shocking FTX blowup.

While cryptocurrencies continue their unregulated and highly volatile journey on the outskirts of global economies, the distributed ledger technology (DLT) that underpins them will start to emerge as a source of value-creation for companies and investors according to a whitepaper from US investment giant Invesco.

Cryptocurrencies may take up most of the headlines, the Crypto vs Currency: 2023 Digital Assets Outlook says, but the real investment potential lies in DLT.

“While cryptocurrencies have dominated the digital assets narrative, distributed ledger technology (of which blockchain is an example) is the object of increasing interest outside the context of cryptocurrencies,” the report states. “Such efforts have less to do with investable assets and instead focus on how blockchain may be able to be deployed for infrastructure efficiencies.”

The issues around cryptocurrency are numerous, the report highlights. Cryptocurrencies are tied to those with a broader risk appetite due to their volatility, which inhibits their use as investors age. They are also have “few idiosyncratic factors”, and are subject to prevailing monetary conditions.

“Such token-based assets are extremely heterogenous, have little history, and are unfamiliar to investors. At present there are over 22,000 cryptocurrencies counted on CoinMarket.com, many of which have small market capitalisations, little or not volume, and unclear use cases.”

While 2020 and 2021 were strong years for cryptocurrencies, total market capitalisation fell from $2.2 trillion to just under $800 billion in the 2022 calender year. Bitcoin, with about 39 per cent of the cryptocurrency market, fell 49 per cent over the period.

DLT or blockchain technology, on the other hand, has a number of advantages over other infrastructure efficiencies, the report explains. They are validate by numerous stakeholders rather than one central authority, can store data in perpetuity and can have set permission access.

“As blockchain is essentially an information transfer and storage protocol, we believe [it] may have value wherever there is a shared database solution across multiple stakeholders,” the report states. “Moreover, such solutions can be built without the use of an attached cryptocurrency and can be structured for either limited access or public use.”

Applications of blockchain technology can prove challenging however. In 2022 the Australian Stock Exchange abandoned its plan to replace its ageing CHESS settlement and clearing system with blockchain technology and was forced to write down $220 million.

Scrutiny brings legitimacy

Ironically, the Crypto vs Currency: 2023 Digital Assets Outlook says the crypto-focused centralised finance (CeFi) entities that trade, store and lend digital currencies will actually fare better than the currencies themselves in the longer term – despite these CeFi companies attracting some of the most negative headlines, in particular the shocking collapse of FTX.

These businesses operate and are organised as traditional companies and are directly involved in and derive revenue from the crypto ecosystem.

“So far, it is these CeFi (crypto-focused centralised finance) entities that have attracted some of the most negative headlines through failures of management, inadequate capital controls, and, in some cases, making use of aggressive or questionable accounting practices.”

The FTX collapse will trigger more regulatory scrutiny, the paper predicts, but that should be a good thing in the long run.

“We expect that the increasing regulatory scrutiny biases the narrative in favour of CeFi entities, which are by definition more straightforward to regulate. In the short term, this may cause pain for CeFi entities which are the low-hanging fruit for regulators. However, any entity that survives the regulatory gauntlet may be a winner in the long-term, earning legitimacy and credibility with the public.”