Cryptocurrencies will likely continue to settle into stable products, niches and uses, becoming a viable alternative to many fiat currencies. Successful Business spoke to Vladimir Vishnevskiy, the Director and co-founder of St. Gotthard Fund Management that specialises in asset management including cryptocurrency investments, for his thoughts and forecasts on the future of this market.
Why is cryptocurrency market capitalisation growing? Why do most people underestimate the importance of cryptocurrencies?
I think what we see today is a result of several factors that are currently present. One factor I would highlight is the macroeconomic situation in the world right now. With low rates and trust in government institutions arguably at an all-time low, as a result of unprecedented money printing that we have seen since the pandemic started in the US and Europe, I think the world is beginning to prepare for inflation in the longer term. This will inevitably be reflected in the price of real assets, not just classic ones like gold and real estate but also in cryptocurrencies.
It is a question of supply and demand. The fiat currencies, the ones that are issued by the central banks by just pressing a button, may soon be in oversupply. We believe that the whole monetary system that we went through in the past 40 years since the inflationary era in the 1970s, was the result of central bank independence. Whenever inflation went up, central banks raised interest rates in order to contain it. Since the global financial crisis, the supply of fiat currencies has been growing by approximately 12% per annum for more than 12 years. This is why alternative stores of value (gold, real estate, and bitcoin) are now being looked at.
On top of this, another factor that we consider key is the intergenerational wealth transfer. Just recently, there has been a survey showing that the younger generation in their 40s and 50s, who are now inheriting a lot of wealth from the Baby Boomer generation, are much more likely to invest part of their portfolio into this asset class because they see more value in it than in traditional assets like gold.
Lastly, the supply and demand relationship within the crypto sector itself has changed. This year we witnessed the “halvening” that happened in May: since then, every time a bitcoin is mined, the miner gets only half the reward compared to the period before. That obviously changes the supply significantly. At the same time, we have seen a large increase in demand because traditional on-ramps such as PayPal have embraced cryptocurrencies, and now close to 350 million of PayPal users have easy access to bitcoin through their mobiles. All of this leads to upward pressure on prices.
Why have you created the fund, and how can people benefit from participating in your activities?
The fund itself was created because our Cyprus investment office recognised a problem. Due to the negative interest rates in the Eurozone right now, we see that there are not enough investable instruments available to investors looking for a decent yield. Bank deposits do not yield anything. If one wants to invest EUR and receive a yield of 5-6%, then CCC-rated bonds (high-risk) would need to be purchased. Our company has been investing in cryptocurrencies for a while and we recognised that there was a solution within the space. From our viewpoint, investing in junk bonds is not that dissimilar a risk profile to crypto projects. Of course, the latter are riskier, but you have more upside if the project works out, and at the end of the day both are just businesses run by people. People who invested in digital projects like Facebook at an early stage did very well. The risk/ reward ratio of investing in those projects is better. So, what we wanted to provide is a simple and traditional way where people can safely invest in cryptocurrencies. Our fund only accepts euros and you do not need to buy and store cryptocurrencies, as we take care of that. More than 80% of the assets in our fund are held in secure custody which means that we not only offer a nice return and yield in terms of dividends that we may have but it is done with security in mind. Moreover, the risk is insured by a top insurance institution.
How can we make money? We have two main drivers we focus on. First is yield, so we only look at assets where a passive income-generating strategy can be implemented so that we can pay out dividends twice a year. Second is valuation; we rely on a team of highly experienced industry professionals to select projects with solid growth potential. Our investors believe in the cryptocurrency asset class as a longterm investment. They are also interested in receiving passive income as they cannot obtain it from other traditional assets anymore. Crypto assets can offer a big upside from what we have been seeing during the last 2-3 months. Gains of 100% or 200% are very much possible. This is impossible for fixed-income investments. In real terms, that is, after adjusting for inflation, if you have your money in fixed income, then most likely you are going to lose money. Assets going up in price and at the same time offering a yield are tempting for investors because they offer a less volatile risk profile than pure crypto exposure. Through the distribution of dividends every six months, in effect we are reducing the volatility of the investment. The fund will pay out its first dividend in January 2021. It has just reached an all-year high, by the way.
What is the minimum amount of investment in the fund?
€100,000.
Is there any guaranteed income? What percentage would you pay as a minimum guarantee?
There is no guarantee. Our aim is to pay out above 5% per annum (in EUR!) as a dividend, while offering our investors full participation in the growth of the crypto market capitalisation. Our fee structure is the classic 2/20, meaning a 2% management fee and a 20% performance fee with a 5% hurdle and a high watermark.
What is the investment horizon needed for an investor to invest their money, and when can they withdraw their funds if required?
The recommended investment horizon is 3 years and longer because the cryptocurrency ecosystem is still very young. The difference between our fund and many other funds is that it is liquid. Every month the investors can buy in and sell out.
Looking ahead, what is your forecast regarding cryptocurrencies over the next 12 months?
In the past two years, there has been a great deal of behind-the-scenes investment into this space from the corporate world, such as big U.S., European and Asian venture funds, especially into industry infrastructure and security. The result has been that in 2020, companies such as Square and PayPal now offer bitcoin to their customers. At the same time, big asset managers like Fidelity and smaller hedge fund managers have been supporting and buying bitcoin because they are now comfortable with the industry infrastructure available. We think that over the next 12 months, this trend will likely continue.
Calendar-based forecasts are difficult, but it would suffice to say we are very positive on the whole cryptocurrency complex. As we speak, the market capitalisation of crypto is $700 billion, and bitcoin makes up more than 60% of that. This is a very small number in relative terms. The biggest stocks from developed markets are worth considerably more. If you compare cryptocurrencies to gold, about $11 trillion worth of gold has been mined to date. This shows you the proportions that we’re talking about. The value of cryptocurrencies could rise fivefold from where we stand right now, and it would still be worth less than half that of gold.
