Volatility Should Not Hold Investors Back from Accepting Cryptocurrency as an Asset Class in Asia

Asia's traditional financial market has begun to recognize the investment merits of cryptocurrencies and its potential to be accepted as a formal asset class.

Most significantly, Bitcoin futures trading volumes have been on the rise with an increasing percentage of the non-US trades coming from Asia.But why now? Until recently, volatility has held back many institutional players from investing into Bitcoin and the broader cryptocurrency asset class.

Governments, in turn, have recognized the need to keep pace with market developments by introducing these currencies into a regulated trading venue - even though they do not fit under a traditional asset class - to give them greater credibility while managing the risks to investors.

Cryptocurrencies offer investors a new opportunity to diversify their portfolio and a way to hedge against fiat financial markets as a separate asset class.

Taking Bitcoin as a proxy to the broad cryptocurrency market, our research indicates that over the last eight years, crypto assets have had a near zero average correlation with other asset classes and a very compelling capital return.

The extreme volatility with very fat tails, means crypto assets have a probability distribution that exhibits a large skewness or kurtosis, relative to that of either a normal distribution or an exponential distribution.

For these reasons, institutional investors who are experienced with embracing volatility for asymmetric return have started to accept crypto assets as a legitimate asset class.

Finally, as the price discovery process of this asset class becomes more institutionalized, we can expect the cryptocurrency volatility of crypto assets to decline over time.

The growing acceptance of this asset class is especially encouraging for Asia.

No other foreign market has yet to develop a thorough framework to regulate crypto asset platforms.