State Street Global Advisors’ recent Inflation Impact Survey, which focuses on how inflation is influencing investment, shows that two out of three investors are concerned about the economic outlook and more than half are concerned about market volatility, and the fact that the value of their investments is eroding.

So nearly half of these [retail] investors say rising inflation is causing them stress and anxiety. The majority are changing their spending behavior, and they are cutting back on discretionary expenses.

One in four claim that they passed on vacation this year, and the majority believe that the economy is headed for a recession.

Now, with that picture in the background, have there been any effects on cryptocurrencies as an investment, as a result of the economic environment, that are noteworthy in understanding them as an asset class? What can you share with us from that perspective?

Riccardo: I think the trend of cryptocurrencies was impressive, given the macro events. On one hand, there was the COVID-19 crisis, on the other the Russian-Ukrainian conflict, and the following inflationary spiral.

In my opinion these events, the first external and the second internal to the economic-financial system, determined two of the most important shocks of Bitcoin and cryptocurrencies. During the pandemic period of 2020-21, after the initial shock, Bitcoin began to gain after PayPal allowed the use of cryptocurrencies. I think a lot of investors at this time, locked up at home and with pockets full, started investing and betting on Bitcoin. In six months, cryptocurrencies increased from US$12,000 to over US$63,000. The surge has also attracted the attention of the institutional investor, and reached its peak with the IPO of Coinbase, which I mentioned before, in April 2021.

But I think it’s clear this boom was very short because in September 2021 China banned crypto mining, there was a need for regulation from the US and from Europe. Finally, Elon Musk highlighted the environmental cost of mining cryptocurrencies and in this situation Bitcoin decreased below US$30,000 at the end of July. The decrease in the value of bitcoin has continued due to the rise in interest rates and the big inflation and today the price of bitcoin is around US$20,000.

If you look at an index called “Crypto Fear and Greed Index,” Bitcoin is in the “extreme fear zone.” But also, this period offers many investors an opportunity to buy. And so we see that many institutional investors decided to buy cryptocurrencies and to hold them for a long time, for portfolio diversification. In conclusion, my opinion is that it is a mistake to think about the end of crypto assets, and we can consider this a natural process of consolidation of the sector, and cryptocurrencies will play an important role in the financial market and for the institutional portfolio

We have regulatory authorities across all major regions, North America, Europe, and Asia Pacific, all taking concrete steps to bring regulatory clarity to facilitate responsible growth in this market. By way of example, we have the EU’s MiCA Crypto Assets regulation, which was approved this summer. If I look at the US, President Joe Biden ordered a wide range of federal agencies to produce at least 17 reports on topics related to CBDCs, the so-called central bank sponsored digital currency, topics related to consumer protection, illicit activities and international operations. And in Hong Kong, regulatory guidance is expected. So, as you can see, there is a flurry of regulatory activity.

Another element to consider, and you touched upon it slightly in your response before, it has become very apparent that cryptocurrencies get a bad reputation from environmentalists and, we must say, with good reason.

The Cambridge Bitcoin electricity consumption index said that Bitcoin consumes more electricity in a year than several entire countries, including Sweden, Norway, and the United Arab Emirates. And that’s quite shocking, right? Especially in light of the recent war in the Ukraine, and the effect that it is having on energy, and energy prices, when here in Europe we’re even thinking of putting caps on the utilization of electricity during the upcoming winter.

So against that background, what potential do cryptocurrencies have as an institutional asset class? And what uses, if any, might they have in an institutional portfolio in light of regulation coming for ESG, but also at the same time with what we talked about before, in terms of their performance during the times of crisis

Riccardo: About four years ago, when Bitcoin was trading below US$10.000 the market was dominated by retail traders, but in the following years there was a great involvement of financial institutions. Cryptocurrencies have a different trend from other financial assets, and for this reason they capture the interest of financial institutions who want both to reduce the correlation with the other assets in their portfolio and to diversify the assets.

And in the last year institutional players have started to accumulate larger volumes of Bitcoin and Ethereum, not only as a way of combatting inflation but as a way to generate a constant, tangible and fixed income stream. I’ve seen surveys showing that large investors believe that, by 2026, seven percent of their assets will be in cryptocurrencies and that 38 percent of traditional hedge funds are currently investing in digital assets. This is strong growth, when you consider only one year ago, hedge fund activity in the crypto world was only 21 percent of the total.

Finally, my opinion is that cryptocurrencies will become a real asset class. We are in a phase of consolidation. There are regulatory problems, reputational risks and problems related to the use of resources for mining. But these problems will be progressively solved and crypto assets will be more and more present in the portfolios of institutional investors.

Thank you Riccardo, for your time and your valuable input here, it was a very interesting contribution to the topic.