You will forgive me for going off piste at the start here, and looking first to a development in France, before addressing the key point in the headline – but I feel that the scene requires a little setting.
Last week, Melanion Capital announced that it was going to launch an EU-regulated fund that closely tracked the price of Bitcoin.
According to the Financial Times, which was among the publications to report the news, Melanion had ‘[…] recently received approval from the French regulator to launch an exchange traded fund that complies with the EU standards known as Ucits’.
“The fund,” said the FT report, “will track a basket of up to 30 stocks in sectors such as cryptocurrency mining and blockchain technology, which Melanion says is up to 90% correlated to the price of bitcoin.”
Expert Investor reached out to the company to get more details, such as how well this fund’s backers were protected if Bitcoin took another dive in value, as it did earlier this year; and how many investors and how much interest there had been in its products.
In an emailed response, Roland Nasr, an analyst at Melanion Capital, said: “The investment in our product is best if it comes as a diversifying tool and part of a long-term portfolio strategy. The Index tracked by our fund is a basket of equities correlated to Bitcoin. It’s a beta-based weighting methodology that overweight companies with a strong correlation to Bitcoin, therefore there is no bias or direct link toward the direction, up or down, Bitcoin takes. That being said, our fund being made exclusively of equities, investors are protected against theft, hack, or loss risks they might experience if they held Bitcoin in direct.”
If there is ‘no bias or direct link’ to whether Bitcoin goes up or down, I am not entirely sure what the point of this product is. Placing the emphasis on cryptocurrency in the announcement seems like a headline in search of a story.
There is no suggestion that Melanion is doing anything unethical or wrong; but, judging by its LinkedIn profile and website, it seems to be a fund at the smaller end of the market and the release trumpeting its new product is more sizzle than steak.
Emperor’s New Clothes
While I was writing this story, the company did send over documents outlining how the product is structured.
According to Melanion Capital: “The Melanion Bitcoin Exposure Index captures the net total return performance of a selection of companies, listed at recognised North American and European exchanges, exhibiting the highest correlation and revenue exposure to Bitcoin.”
That all means something. I am just not entirely sure what.
I hate singling out a company like this, but there is a whiff of Emperor’s New Clothes around cryptocurrencies. These are largely unregulated and unsecured products that have drawn in a lot of investment from people looking to make a quick buck. And there are too many of these products in the market. Even the leader of the pack, Bitcoin, has seen its value plummet in recent months. And the scandals and scams are now beginning to appear.
All of this is to be expected because these things have no value. As Bill Maher said recently, “The whole thing is a joke.”
Changes in Germany
So while it is no surprise that places like ETC Group and Global Digital Finance (GDF) can crow about the benefits of cryptocurrency, it is a shock that there are new German rules on institutional investors now being able to invest up to 20% of their assets into crypto.
In a release sent recently to Expert Investor, Lavan Thasarathakumar, director of regulatory affairs for the Emea region at GDF, said that the new ruling from Germany ‘[…] opens the gates for mass adoption’.
They added: “Increased institutional investment into cryptoassets will pave the way for new products and services to be produced and for more innovative solutions that can take the crypto industry on to a new plain and deliver on some of the benefits that it has promised.”
But I am not buying it. What sort of institutional investor is likely to stick up to 20% of their assets into what is essentially a get-rich-quick Ponzi scheme? Cryptocurrencies are for young, unsophisticated investors gambling hard with largely five-figure sums.
Institutional investors, on the other hand, are serious, sober, and conservative. Plus, the ones who read Expert Investor are usually 23% better looking than the general population. What is in it for them?
Amarjit Singh is head of blockchain assurance at Ernst & Young. Expert Investor reached out to him to ask about the current landscape around cryptocurrencies. “I’m not an investment adviser so I can’t comment from that perspective,” he says. “But what I can say is that we’ve had a lot of interest from a lot of wealth management clients, who are being pressured by their private client base for crypto-based products. They’re looking for exposure to that asset and they’re exploring with us what products might be created or might be offered to their clients.”
Singh accepts that regulators have called cryptocurrencies ‘highly risky’. And when his team looks at this space, it is with an eye towards a thorough due diligence process. “The key point for us,” he says, “is to ensure that we understand the nuances and potentially the changes in risk because of what this product is.”
He adds: “I appreciate the challenge that regulators have at the moment. Personally, I think regulating appropriately and the benefits it brings would be a good thing. You can argue that there are changes that need to be made to what the EU has been doing, but I like its ambition to put something out there because it allows people to set up a market and provide a product with the knowledge of regulatory certainty.”
There is not much to say about cryptocurrency because the very essence of its existence—or lack of it—is that it is not only decentralised, but also completely and entirely lacks substance and accountability and security. Smart, long-term investors should stay far, far away from the entire thing. Those that do not are liable to learn a short, hard lesson about how when something seems too good to be true, it usually is.