We reached out to Alexander Mearns, CEO and Mohammad Hassan, Head Analyst at Eurekahedge to discuss the presence and the future of cryptocurrency markets.

Eurekahedge, world’s leading independent data provider in hedge fund news, indices and databases, was launched in 2001 by financial professionals. In 2013 the company launched Crypto-Currency Fund Index, tracking the performance of hedge funds with holdings in bitcoin, ethereum and other digital cash. We reached out to Christine Chng, Head of Communications & Events at Eurekahedge to discuss the presence and the future of cryptocurrency markets.

You launched your Crypto-Currency Fund Index as soon as in 2013, when cryptocurrencies haven’t yet been the mainstream media thing. What motivated you to enter such a volatile market?

Over the years as the hedge fund space has become crowded, emerging managers have looked towards exotic strategies and sources of alpha to distinguish themselves and gain interest from investors. The launch of cryptocurrency funds is one such development whereby traditional FX focused strategies profiting of carry, trend and momentum have ventured into alternative currency as the likes of bitcoin. Our decision to launch a cryptocurrency fund Index is aimed at providing an effective industry benchmark to investors and fund managers alike to gauge the returns from their crypto-currency portfolios. In addition, for those who are deliberating entry into this fast evolving space, the Index serves as a useful source of insight into the kind of risk-return profile you could expect from exposure to crypto-currencies.

Now investors seem to be flocking to blockchain and cryptocurrency based businesses. How have circumstances changed since you started in this field? Is it any safer or more profitable to put money in this market?

It’s is definitely starting to gain traction, but the risks remain – and as the industry continues to set new record highs in terms of market capitalization, it would only be a matter of time before the regulators step in and take stock of the whole situation, and that is the biggest wild card here. The Australian regulators have recently said that it’s not their job to regulate the crypto space as it’s not a security. It remains to be seen how other regulators perceive this issue, or change their existing views on crypto-currencies – this is the big unknown essentially – how will the world come to terms with the rise of crypto-currencies, will it be enabled or inhibited in its quest for widespread adoption.

In fact, in the not too distant past, over a period of 14 months between December 2013 and January 2015, the Eurekahedge Crypto-Currency Fund Index lost almost 73% of its value from its 2013 high. In contrast the Bitcoin Price Index lost almost 81% of its value. There is no reason to dismiss this from happening again. Having said this, it appears that a select few investors are starting to look at crypto-currency hedge funds from the perspective of risk capital deployment given the potential of outsized returns should things continue to be favourable.

Which businesses or economy sectors are pushing cryptocurrencies the strongest? The same question goes to the countries: where does the biggest interest in crypto come from, geographically speaking?

Banks, central banks, financial companies. US, HK, Singapore, Australia seem to be pretty clued up on cryptocurrencies. There’s much interest from Europe and Russia as well.

Rising popularity of cryptocurrencies inspires diversification. In your opinion, how reasonable is to invest in cryptocurrencies other than Bitcoin? Which ones are worth a try?

Diversification based on proper due diligence would be advisable –  and with over 700 cryptocurrencies around in the marketplace, one needs to be extra cautious lest you end up putting your money in the likes of 'Paycoin or Coinye’. The most important factor to consider here is the liquidity or depth of the market which signals the adoption rate across a given cryptocurrency and hence it’s future success and value assuming that regulations affect all cryptocurrencies equally. This also explains why bitcoin continues to lead in terms of market cap despite various other alternatives, the wider its adoption, the more readily acceptable it becomes as „legal” tender so to speak and the more valuable it becomes as a perceived store of value.

Pertinent to mention here that Ethereum has a great architecture but the current use case seems to be limited to ICOs and more altcoin exchanges, most of the large players in the space are taking this open source architecture and launching their own private blockchains.

Furthermore, many ICOs (initial coin offerings) are basically just cash grabs (aka spamcoins) so one needs to be super careful when looking at these new offerings

Will the world move from a centralized form of transactions economy to a decentralized one? And, where exactly will crypto-currencies lie in the space between precious metals and fiat currencies. These are the two main unknowns here, and at the end of the day, it depends on your risk appetite before you consider allocations to crypto-currencies.

Let’s speculate: how long is it going to be before the mass adoption of cryptocurrencies happens, like for daily shopping? Is it going to happen at all?

Very difficult to say. Some issues that spring to the mind immediately:

a)      Cyrpto-currencies are too volatile at the moment given all the uncertainty surrounding their future – why should companies exchange goods and services in crypto-currencies and take on this added 'currency’ risk in the presence of something more stable like the USD for example? Two things might make them change their mind, a) lowering price volatility for cryptocurrencies and b) loss in confidence for the USD or other fiat currency systems.

b)      If transactions move to the realm of crypto-currencies on a sizeable scale, what role will traditional currencies be relegated to? What about central bank control over monetary policies?

c)       Perhaps the development of 'Amazon-coin’ or 'Google-coin’ or 'Alibaba-coin’ could induce a wider acceptance of cryptocurrencies if they encourage their customers to transact in cryptocurrencies in online retail stores. Or these retail giants could just turn to the likes of bitcoin and benefit off the liquidity it provides. Either way both governments and the new digital economy will have to work together to drive increased adoption of cryptocurrencies in the market place, but it will take a long time. To offer some perspective, we are essentially talking about cryptocurrencies being 'freely usable’ one day and in effect being a contender for reserve currencies in the IMF’s SDR basket.

Interviewed by Przemyslaw Cwik