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    Are Cryptocurrencies An Asset Class?

    Abstract:In an attempt to properly regulate the nascent industry, regulators and key players have sought to properly understand which category to place these digital currencies in, with rising uncertainty as to whether they are an asset class or not.
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    •   Goldman Sachs has stated that Bitcoin and other cryptocurrencies cannot be referred to as an asset class.

    •   The CEO of Digital Currency Group, Barry Silbert, also holds the same opinion as Goldman Sachs.

    •   Meanwhile, the Securities and Exchange Commission (SEC), in the ongoing saga with Ripple, referred to XRP as a security, citing the centralized manner in which it was developed and distributed.

    •   Do cryptos qualify to be called an asset class?

      Cryptocurrencies and the underlying blockchain technology may be still in their infancy, with Bitcoin having the first-mover advantage by launching in 2009.

      Since then, flurries of ICOs and new cryptocurrencies have flooded the market, making it inevitable that regulatory agencies would examine the impact that these digital currencies could have in the financial space.

      In an attempt to properly regulate the nascent industry, regulators and key players have sought to properly understand which category to place these digital currencies in, with rising uncertainty as to whether they are an asset class or not.

      What Is An Asset Class?

      An asset class is defined as a collection of financial instruments that tend to share similar characteristics in terms of price and financial structure.

      In fact, these asset classes are even traded in the same market and are subject to the same rules and regulations. Generally, asset classes include stocks, bonds, cash or its equivalent, real estate, futures, and other financial derivatives.

      The Case Against Calling Cryptocurrencies An Asset Class

      The peculiar nature of cryptocurrencies has led Goldman Sachs to refer to them as not being an asset class during one of the investment banks recent client calls.

      Their opinion was amplified by a tweet by the CEO of Digital Currency Group, Barry Silbert, who attended the client call and highlighted the slide with the header “Cryptocurrencies including Bitcoin Are Not an Asset Class.”

      Goldman Sachs holds this opinion because, according to them, a cryptocurrency cannot “generate positive cash flows, neither does it mitigate volatility and fails to show evidence of hedging inflation.”

      Similarly, the SEC reiterated its stance concerning Bitcoin, Ethereum, and other cryptocurrencies during its ongoing legal tussle with Ripple.

      According to the SEC, XRP is not a security because of the centralized nature of the way in which the asset was developed and distributed. Is it right then to say that cryptos are not an asset class?

      On the Flipside

    •   Despite an earlier negative stance, Goldman Sachs is set to offer its clients Bitcoin and a range of digital asset services.

    •   Goldman Sachs‘s offering to its clientele will be in the form of physical Bitcoin, derivatives, and traditional investment vehicles, says Mary Rich, global head of digital assets for Goldman’s private wealth management division.

    •   The investment bank has also reported that institutional demand for Bitcoin has been rising.

      The Case For Calling Cryptocurrencies An Asset Class

      By the very nature of the definition of an asset class, cryptocurrencies may qualify.

      Cryptocurrencies could pass as an asset class because they share similar characteristics and are subject to the same legislation in certain jurisdictions.

      The recent launching of Bitcoin ETFs in Canada, and the brewing launch in the United States, is a testament to the fact that regulators are changing their stance and seeing cryptocurrencies in a different light.

      A Bitcoin ETF offers investors the advantage of increased diversification and other benefits like typical asset classes. The ability to trade futures in Bitcoin and other cryptocurrencies offers further proof that these digital currencies may be considered an asset class.

      It appears that the very nature of cryptocurrencies makes them an asset class. Many of the people who argue against that fact are major critics of crypto.