SINGAPORE (Dec 7): Cryptocurrencies are a highly speculative and risky investment – although they do have the potential to develop into a new asset class in the future, according to Deutsche Bank Wealth Management, the wealth management unit of German lender Deutsche Bank AG.

Known cryptocurrencies include Bitcoin, Ehtereum, Ripple, Litecoin and IOTA – each with their own currency generating process, and considered scarce commodities as the amount of available currency units is limited by mathematical algorithms.

In the latest CIO Insights Reflections: Cryptocurricies and blockchains – their importance in the future report, Christian Nolting, Global CIO and Global Head of Wealth Discretionary, assesses the potential, risks and limitations of cryptocurrencies as well as blockchain technologies.

The conclusion is that while cryptocurrencies could be an interesting alternative to diversify portfolios, there still remains an appreciable risk of major losses due to their high volatility and lack of regulation.

“Since the beginning of cryptocurrency payment methods in 2011, opportunities have increased, but cryptocurrencies are still a long way away from getting global acceptance. This is why cryptocurrencies cannot be seen as a universal currency,” Nolting explains.

While cryptocurrencies have become increasingly interesting to retail businesses, their transaction costs are set to change because of rising demand working in favour of the miners, which the CIO believes will limit valuations.   

For example, power consumption arising from Bitcoin mining now amounts to 24.52 terawatt hours annually, resulting in higher transaction costs and environmental concerns. On the other hand, cryptocurrencies like IOTA have avoided this problem, consuming no energy as mining is not possible.

Another risk faced by cryptocurrencies is the potential development of quantum computers, which can decrypt the algorithms that encrypt cryptocurrencies, and are expected to be available for purchase in 10 years at earliest. However, new encryption methods that are protected against these high-performance computers are expected to emerge by then.

Nolting further highlights that the criterion of general acceptance has yet to be fulfilled by cryptocurrencies, and as such, central banks and the relevant literature will not vouch for their quality. In order for them to do so, more regulation and some degree of security is required to be implemented for cryptocurrencies to provide more trust, transparency and security to investors, he adds.

“Main factors likely to affect the future development of cryptocurrencies are, in our opinion, interventions by the government and central banks, and questions on how the sector will be regulator. Also keep an eye on the growing competition between cryptocurrencies,” says the CIO.

Conversely, Deutsche Bank is positive on the opportunities associated with blockchain technologies, with an estimated 10% of worldwide gross domestic product (GDP) likely to be regulated by the blockchain by 2027.

Nolting expects blockchain technology to change the business models of companies in a sustained way in future as, in his view, it enables a faster and cheaper exchange of assets and financial products between individuals without an intermediate – with guaranteed security due to its decentralised system without a central database.

Due to the disruptive potential of the blockchain, he sees “major opportunities” for stock markets and trading, protect elections, and even enabling agreements between employers, governments or companies directly as well as the registration of rights on ideas, innovations and digital goods.

“Distinguished by high transparency and a decentralised system, we see the blockchain as one of the most innovative developments in recent years,” says Nolting.

“If blockchain can create trust in the public sector, then it could sharply reduce the need for lawyers, accountants, and so on, in these public or private sector functions. In other words, artificial intelligence (AI) is not the only threat to white-collar jobs.”