In a move that closed the last loopholes, the Chinese government has banned all crypto transactions and mining. The resulting price declines highlight the asset class’ inherent volatility. The China crypto ban is a big step. Wealth managers need to ensure investors are aware of the risks given that understanding of cryptocurrencies remains low – even in the HNW space.
Going forward, not only will all onshore crypto transaction be considered illicit financial activity, but also those provided by exchanges offshore. This has left local investors scrambling to access or protect their assets. While similar moves by other countries are unlikely, it shows that cryptocurrencies remain speculative assets. Within a day of the government’s announcement, the price of Bitcoin fell by more than 6% and Ether dived 9%.
Despite strong price volatility, demand for digital currencies has skyrocketed in recent years as investors are drawn in by capital appreciation opportunities. Data from our 2021 Global Wealth Managers Survey shows that two thirds of wealth managers report rising HNW demand for cryptocurrencies. Almost equally bullish, 47% expect further growth in the value of Bitcoin over the next 12 months, while 32% are neutral.
This positive outlook combined with sustained investor demand will continue to drive uptake. However, as cryptocurrencies occupy a greater share of investors’ portfolios, wealth managers will do well to ensure clients are aware of the risks involved – including trouble liquidating holdings.
Our data shows that globally, half of wealth managers agree that HNW investors’ understanding of cryptocurrencies remains limited; meanwhile just 17% disagree. Investors need to understand that Bitcoin and the like are not just digital currencies – they are investments without cash flow. As such, they need to be balanced with appropriate access to liquidity, ensuring investors can ride out these all too frequent storms, such as the China crypto ban.