Crypto proves too risky for local fund managers

Dicey games: Bitcoin, the leading cryptocurrency, is up by more than 400% in the 12 months to date ILLUSTRATION.BERNARDMARR.COM
Dicey games: Bitcoin, the leading cryptocurrency, is up by more than 400% in the 12 months to date ILLUSTRATION.BERNARDMARR.COM

Local asset managers handling billions of pula in local pension and insurance funds are staying away from cryptocurrencies, the volatile but increasingly popular class of virtual currencies whose returns outperformed all other traditional asset classes last year.

In 2020, the most popular cryptocurrency, Bitcoin, surged by 300%, providing returns 10-times better than the next best-performing asset, while the global value of the cryptocurrency market reached $1.5 billion (P16.7 billion).

By Tuesday, Bitcoin was 403% higher than it was a year previously, with the performance including wild swings of lows and highs during the period.

By comparison, the Botswana Stock Exchange’s Domestic Companies Index (DCI), the main vehicle used by fund managers for local investments, has risen by 0.65 percent thus far this year and by 0.41 percent in the last 12 months. Individual counters are, however, enjoying strong performances this year, with the DCI’s top-performing company, Letshego Holdings, having risen nearly 70% this year.

Allan Gray Botswana managing director, Phatsimo Ncube said the difficulty in investing in cryptocurrencies was around assigning values and forecasting price movements, which are both required before a position can be taken in any investment. Allan Gray Botswana holds P9 billion in assets under management, a figure which includes significant pension fund assets.

“We spend a lot of time researching assets and companies, talking to managers and saying this is how we expect them to perform, in coming up with a value,” she said. “The problem with cryptocurrencies such as Bitcoin is that it is very difficult to come up with a valuation for it. “If we say it’s $1,000, we would want to buy cheaper and have the price go up. “However, we don’t know what the price is or will be and we also don’t know its intrinsic value and so we cannot ascribe a value for it in our research.”

Ncube said while asset managers were taking note of cryptocurrencies and the blockchain technology that supports them, there was the belief that the different cryptocurrencies were overvalued and the lack of regulation was an additional risk.

“In the last month, China has banned the use of cryptocurrencies and we are also seeing central banks coming up with their own digital currencies in order to kill the cryptocurrencies because the ones from the central banks can be monitored and regulated,” she said.

The position taken by local fund managers is in line with the Bank of Botswana’s own policy in which it has described cryptocurrencies as “speculative assets without the backing of any underlying economic activity”.

“The bank is neither considering reviewing its policies and guidelines to include cryptocurrencies,” BoB spokesperson, Seamogano Mosanako told BusinessWeek earlier this year.

“These speculative assets are neither subject to any clear governance and/or regulatory framework across jurisdictions nor within acceptable risk parameters established by the board, which is a prerequisite for any instrument to be included in the bank’s investment universe.”

A local cryptocurrency enthusiast said the BoB, as the country’s monetary authority, was being responsible in staying away from cryptocurrencies.

“Anything contrary to this responsibility would be an abdication of responsibility and this is what all central banks are saying to their nationals,” the expert said, requesting anonymity for professional reasons. “If you interact with any genuine cryptocurrency platform, they all have an almost similar caution that usually goes like "Cryptocurrency is highly volatile, please do not invest money you cannot afford to lose". “You literally can lose all your investment, just like you can make money you never dreamt of.”

He added: “There are currently no regulations for cryptocurrencies, mainly because many governments are still struggling to identify it; is it money, stock, or something else? “Having said that, however, since the genesis of cryptocurrencies the trending topic in central banks is the introduction of Central Bank Digital Currencies? “The Chinese have led the way on this one.”

He told BusinessWeek that generally, Batswana appear to have low interest in cryptocurrencies, possibly driven by reluctance to take up the currencies. Scams invoking the names of popular cryptocurrencies also appear to have turned many away from digital currencies.

“Scams will probably grow with crypto, both in frequency and attractiveness. “We are talking about something that runs on complex technology, although the end-user point is not too complex. “Unfortunately with crypto, you really have to know what you are dealing with. “I would say to anyone alive today, whatever you believe about cryptocurrency, take some time to learn about it so that you can challenge or validate your beliefs.”

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