Bit of an asset – the rise of cryptocurrency

8 July 2014

The global financial crisis changed many things, but perhaps none as significantly as the financial services sector. Future Banking talks to Natexis chief economist Philippe Waechter about the factors shaping the world of asset management.

Cryptocurrency - more commonly known as bitcoin - came on to the financial scene in 2009, deep in the midst of the financial crisis. Since then, its popularity has grown and the currency, and the principle behind it, has secured a lot of media coverage.

But, at the time of its development, the prospect of seeing the bitcoin as an asset-management proposal was perhaps one of the furthest things from reality one could have considered. Although it's fair to say that in the financial sector at that time, one was seeing things that only a few years ago would have been laughed off the trading floor, let alone proposing as a real investment prospect.

Today, the bitcoin is a key product for investment. Venture capitalist firms are looking for the next big thing, start-up funds have been launched and individuals are looking at the currency, and others like it, for opportunities to make some money. So, where did this trend start and, more importantly, where is it headed? Natexis chief economist Philippe Waechter believes the rush to invest in cryptocurrency is partly driven by the uncertainty that has been seen in more traditional investments over the recent turbulent financial period.

"What we've seen in their behaviour is they don't want to take too big a risk," he says, speaking of his clients.

Natexis is the international corporate investment management and financial services arm of Groupe BPCE, the second-largest banking player in France. It manages clients' assets across the ever-growing array of investment portfolios.

"There is a lot of unemployment in France and so there is much uncertainty about income," Waechter says, recalling the past five years. "We have seen a change in the way that people save and the type of asset they really need to have.

"There is a trade off in uncertainty; if you have uncertainty in your job, you don't want uncertain assets. The other part of the cycle - for example, at the end of the '90s - there was no uncertainty on employment, growth was strong and so people wanted to take risks on their savings."

But how does this view align itself with investments such as bitcoins when, as Waechter points out, a more stable economic climate is more conducive to risk?

"We are in the other part of the cycle and that's very problematic for us because people do not want to buy what they see as risky assets, so it's a very narrow choice," he explains. "They want smaller, specific assets."

Part of the bitcoin's appeal is that it's not tied to any central bank or monetary policy; according to Waechter, it's more like a philosophy and akin, in investment terms, to gold. But this is where the risk lies.

"For me, because it's not very different from gold you can have a volatile project for this kind of asset," he explains. "It's very different to the large types of assets we manage every day, meaning it poses specific issues. It's narrow - like a fad, where everyone wants to look at it and to try it out. So you have had a very volatile and high price."

"The rush to invest in cryptocurrency is partly driven by the uncertainty that has been seen in more traditional investments over the recent turbulent financial period."

As with many fashion trends to which time quickly comes to an end, the bitcoin could face the same fate as a meaningful investment proposition, warns Waechter.

"We don't know exactly what will happen in the future and whether it will develop a lot or not," he says. "When uncertainty lowers, central banks tend to have a more orthodox policy, so if the situation becomes more normal, then perhaps bitcoin will disappear."

Investment climate

The investment climate in France, like many countries in the developed world, is two-tier with institutional investors looking to take more risks than their private counterparts.

"You have to distinguish between institutional customers who take risks sometimes and the retail [private] ones," says Waechter. "This layer, when there is a lot of uncertainty, doesn't want to take on too much risk. We've seen that in France, but when you read studies from other countries, you find they have the same kind of behaviour."

But prospects are looking brighter even though the recovery is fragile and patchy. Waechter believes the business cycle is strengthening, but there remains clear weaknesses. While the US is leading growth, many parts of Europe are lagging behind, with the exception of the UK. But even the UK economy has its problems.

"We've seen a lot of debt," says Waechter. "Consumer debt has increased and the UK has a real-estate bubble again. At the same time, real wages are going down.

"In the eurozone, we have a very different situation. Germany, which exports a lot to Asia, is strong, but at the same time France, Spain, Italy, Portugal and Ireland are still very weak. Countries like Spain, Italy or Ireland are maybe 6-8% from their peaks before the crisis in terms of GDP."

According to Waechter, one of the major issues the UK Government needs to tackle is GDP per capita, which, he points out, remains lower than before the crisis.

"As well as that, we have emerging countries that are currently the weakest part of the recovery and that's something entrenched in the indusrty. Before the crisis, the leaders of the global business cycle were emerging countries, with China at the top. That's no longer the case and the business cycle is currently led by the US," he says.

Before the financial crisis, emerging economies - specifically China and India - had helped drive growth globally. China was exporting and importing in huge amounts, and as it's domestic economy grew so did its personal wealth and with it came a wave of consumerism never before seen in the country. While this is no longer the case, it has posed challenges for economies the world over, in particular in the West, which, says Waechter, led to a fall in capital inflows for the emerging economies, and has a cyclical affect.

"Before the economic crisis, it was China emerging and the developed countries chasing," he explains. "Now it's developed countries leading, with China and all the emerging countries trying to find a way to recover their own trajectory."

In part because of this, he believes the investment climate, particularly in Europe, remains weak and sluggish.

With the financial crisis, like personal debt, governments and their monetary policies have been affected. It led to a string of ratings agencies downgrading economies such as France. Its AAA rating was marked down to AA earlier this year. The move, it was mooted, would have a dramatic impact on financial markets in France and across Europe. However, according to Waechter, it hasn't changed a lot.

"Agencies say that growth is weak in France,' he states. "We have a very low growth trend, but the question raised by rating agencies was, 'What will happen to the blue-chip deficit? What will happen with debt sustainability?' We don't know. We were not surprised by what was said, but the impact has been very low. It's a kind of non-event, but important nonetheless. Yet, it hasn't had a strong impact on our behaviour towards French financial markets."

A technical revolution

Perhaps the biggest challenge the world of asset management faces is what Waechter brands a "technological revolution". In recent months, trade press has been taken up with the issue of technology and how it's changing the world of asset management. So far, its reach has served to help asset managers be more efficient, cut costs and provide their clients with a better service offering.

"If you are a bank customer at home, you don’t go to the bank at the corner of the street any more; you use your smartphone."

Boasting sophisticated financial capabilities such as payment systems, the likes of Google, Facebook and Amazon have, at the very least, unsettled the nerves of those working in asset management. To highlight the almost predatory position that some argue the tech world is occupying, JP Morgan's chief executive Jamie Dimon is quoted as saying, "When I go to Silicon Valley... they all want to eat our lunch".

Waechter believes the kind of dramatic changes seen in the way people shop in recent years - citing the likes of online retailer Amazon for the way it has transformed shopping - could soon filter through to financial services.

"We don't know exactly how things will go but, probably, in ten years from now, we will do banking and asset management very differently from what we've done for the past ten years," he says.

Much of this change will come because, when it comes to information, the desire of clients to have an instant response or access to their accounts and how they're performing is burgeoning. But this in itself is challenging traditional asset management businesses because their clients want and need very different things.

"When you have a retail customer you can give them an app for their smartphone," says Waechter. "But an institutional customer needs more sophisticated information."

The challenge, he adds, is understanding what kind of information they will need and how best to meet that need with technology.

"That's a large part of our business, just to be able to give them all the information they need, and we have to do it in a very technical way because our competitors do the same," says Waechter. "Whether you're in asset management or banking, all financial services providers use technology. If you are a bank customer at home, you don't go to the bank at the corner of the street any more; you try to manage from the most comfortable place - your house - using your smartphone. Whether we are banks or asset managers, we have to convert to this kind of behaviour."

Clear uncertainty

The investment and asset-management worlds are going through a period of significant change. The investment challenges are clear -uncertainty, and a smaller and more geopolitical world.

"You have uncertainty everywhere," says Waechter. "You turn on your radio in the morning and someone will be speaking about China, Russia, Ukraine and the Federal Reserve's interest rates, and you ask how can all of this be managed together? Our role is to try to provide a way to understand all of these issues."

That has always been the case. The role of an asset manager is to advise and help protect their client; it's just the types of crises that are changing. But, it is technology that brings the biggest uncertainty today.

"Two decades ago, if you were to show a financial organisation the tools and data we have available today, they would be astounded by how far technology has come," says Waechter. "Putting aside all the technological constraints, what information and dream systems do you think banks and wealth management organisation will have in the next ten years?"

Natexis chief economist Philippe Waechter.