The term "digital assets" may have once seemed like a futuristic concept, but times have changed quickly. In the past years, the financial world has witnessed how digital assets have gone from controversial to becoming an investable asset class of its own. Today, the market for digital assets is already exceeding USD 1 trillion, with numbers from 2022 showing that a third of hedge funds are actively investing in cryptocurrencies (AIMA, 2022).
As the interest in digital assets continues to rise, more and more investors are exploring the effect of mixing it into their investment portfolios. We at Kaleido believe digital assets will play an important role in the financial ecosystem of the future - and we want to help you get the most out of this megatrend.
In this article, we'll explain five important aspects to consider if you're thinking about adding digital assets to your investment portfolio. We'll provide you with the information, and then the decision is up to you. Let's explore the world of digital assets together!
What are digital assets?
Before we dive into the effects of adding digital assets to your portfolio, let us first explain what digital assets are to ensure we are on the same page. Simply put, a digital asset is a type of information or data that is assigned a value, and which exists and trades digitally. In other words, they are virtual representations of value. These assets come in various forms, including cryptocurrencies, digital art, digital music, online gaming assets, and more. For this article, our focus will be on cryptocurrencies.
If you've been following the financial world, you've probably heard of popular cryptocurrencies like Bitcoin, Ethereum, or Litecoin. These digital currencies work on decentralized networks called blockchains, which means they are relatively transparent and accessible globally. You can easily buy, sell, and trade digital currencies on cryptocurrency exchanges and even hold and manage them yourself on a so-called wallet. However, we also offer all these services to you as a bank. In doing so, clients benefit from the best possible solution in terms of regulation, safekeeping security, as well as user-friendliness thanks to the integration with our e-banking. Investing in digital assets can offer various opportunities for potential growth. Some investors choose to hold digital assets for the long term as part of their investment strategy, while others actively trade them. At Kaleido Private Bank, we can help with investments in more than 20 different cryptocurrencies.
Now, it is time to explore five important aspects to consider when it comes to digital assets.
Five Key Benefits and Considerations
The Diversification Effect
As interest in digital currencies continues to grow, more and more investors are considering adding cryptocurrencies to their investment portfolios. One important reason for this interest is that cryptocurrencies can provide a way to diversify investments. When economic conditions impact traditional markets, digital assets may respond differently, which could help balance the overall portfolio performance.
A survey by KPMG found that wealthy individuals and family offices in Hong Kong and Singapore have already started including digital currencies in their portfolios. Over 90% of the respondents have either invested in digital currencies or plan to do so (KPMG, 2022). However, most of them only allocate a small portion, less than 5%, of their portfolios to digital assets.
If we look at the results of having invested 5 % of a portfolio in Bitcoin from 2013 until today, then we can see something exciting. By investing 5% in Bitcoin and mixing it with a standard 60/40 portfolio (57% stocks, 38% bonds, and 5% Bitcoin), the portfolio with Bitcoin would have provided higher returns (64.5%) compared to the classic 60/40 portfolio (40.1%), and that with only a slightly higher risk.
The Potential for High Returns
Another important aspect to think about is the potential for significant rewards that this alternative investment offers. It's not just tech enthusiasts who are interested in cryptocurrencies; experienced investors are also attracted by the possibility of high returns.
However, it's essential to be aware that cryptocurrencies come with a notable risk due to their high market volatility. Unlike traditional assets like real estate or private equity, cryptocurrencies can be bought and sold 24/7 on cryptocurrency exchanges, making them easily accessible. This accessibility contributes to higher volatility, where prices can sharply fluctuate in short periods.
The market for digital assets is still relatively small compared to more established investment options like stocks or bonds. As a result, panic selling can lead to rapid price drops, potentially erasing gains made over months or years in just a few days. This makes digital assets vulnerable, especially for less experienced investors.
For those who prefer lower risk and a long-term approach, it's crucial to consider investing with a well-calculated risk tolerance and a patient outlook. By adopting a long-term perspective and being prepared to endure some ups and downs, investors can take advantage of the growth potential in digital assets, making it a great opportunity for long-term growth.
Hedging Against Inflation
In times of uncertainty when the value of regular currencies is declining due to inflation, some investors opt to protect themselves by including digital assets in their portfolio. Unlike traditional currencies, certain digital assets, such as Bitcoin, have a limited supply. This scarcity has led people to view Bitcoin as a possible defense against inflation. When digital assets are part of a portfolio, they can potentially safeguard wealth better against inflation's harmful effects on regular currencies. By adding a digital asset like Bitcoin to your portfolio, you could gain an extra layer of protection against the erosive impact of inflation. However, even if Bitcoin should possibly prevail as digital gold in the long term, it has also become apparent, especially in recent months, that other influencing factors, such as central bank liquidity, can have a much greater impact on price formation in the short term and thus dominate the long-term inflation protection aspects.
Participating in the Technological Innovation
Investing in digital assets is a way to be part of the future. These assets are at the cutting edge of technological innovation, thanks to blockchain technology. Blockchain's decentralized and transparent nature has the potential to disrupt established industries.
Cryptocurrencies are proving their worth as a global financial system accessible to all. For instance, during Ukraine's fight against Russia, they raised over $60 million in cryptocurrency donations. Even when banks closed and ATMs ran out of money, people with cryptocurrencies could still make transactions and send funds globally, showing the many practical uses of digital assets.
By investing in digital assets, you become part of a transformative landscape that could shape the future of these industries and possibly bring significant returns. It's an opportunity to be part of something big and potentially profitable.
The Regulatory Considerations
As the digital asset market becomes more popular, governments worldwide are updating their regulations to address this new type of asset. It's crucial to consider these regulatory changes because they can affect the digital asset market and how you invest. To stay on top of things, investors need to keep themselves informed about any regulatory updates in their country. Getting advice from experienced financial experts can be helpful to better understand this complex landscape and make smart investment choices.
However, with the current legal developments in Switzerland as well as in the European Union, we see a friendly trend regarding the rules of the game with cryptocurrencies, which will also lower the entry barriers for new investors, who have been hesitant so far, mainly for the reasons of uncertainty.
Invest with Kaleido
At Kaleido, we strongly believe in the power of digital assets to shape the future of finance. With our knowledge and skills, we are dedicated to assisting you in making the most of this thrilling asset class. Whether you are an experienced crypto owner looking to enhance your user experience, a newcomer eager to diversify your portfolio, or a family office seeking secure custody services for traditional and digital assets – you have come to the right place.
three reasons to consider investing through Kaleido Private Bank:
Services for more than 20 cryptocurrencies We offer services for more than 20 cryptocurrencies, providing you with comprehensive support for trading and safekeeping all your digital assets in one convenient place.
Security is our top priority! Security is our top priority! We understand the importance of feeling secure with your investments, including digital assets. That's why we take every precaution to ensure your digital assets are stored in a safe manner. Instead of keeping your private key on your own and having to worry about it, you can trust us to handle the responsibility while keeping the assets in your name. We work with the best possible providers in this area and use a state-of-the-art infrastructure for the safekeeping of private keys.
All in one place: traditional and digital assets. We bring together traditional and digital assets in one place, allowing you to invest in the assets that interest you. Whether you prefer only digital assets or a mix of both, we serve as your private bank for all your financial needs. You'll have a complete view of your wealth in one place, making it easy to manage transactions and receive statements, tax reports, and advice for all your assets through your e-banking account. It's a convenient and streamlined way to handle all your investments.
Now, what do you think? Curious to add digital assets to your portfolio? Form your opinion and do not hesitate to contact us if you have any questions.