T. Rowe Price has had an early and front‑row seat to the development of cryptocurrencies and the distributed ledgers that enable them.
While we are not currently investors, crypto has an impact across capital markets, and our investment and technology teams are intensifying their research.
We believe that just as in the early stages of the internet, current excesses may recede, and the crypto landscape will likely take shape over many years.
Whether investors welcome it—or even realize it—cryptocurrency, or crypto, is having an impact on their portfolios. The immense size of the cryptocurrency ecosystem and its disruptive effects are being felt across capital markets. Crypto in its various forms is also changing the way businesses operate.
Our analysts and portfolio managers have given us an early and front‑row seat to the development of cryptocurrencies and the distributed ledgers that enable them. Our financial analysts have seen the potential for banks to adopt new technology that makes banking faster and more secure, while also watching the shifting, continually disrupted landscape of mobile payments and fintech. Our retail analysts are watching how cryptocurrency could shape the purchase of goods or services. And our technology and other sector teams have watched as companies—both large, established firms as well as small start‑ups—began to put distributed ledgers to work across health care, cloud computing, cybersecurity, and supply chain management, among many other applications. This is influencing the risks and opportunities we are identifying across the investing landscape.
We don’t hold cryptocurrency in our portfolios. We’ve studied the risk and return characteristics and portfolio implications of cryptocurrencies. The mandates we manage for clients do not currently appear well suited for investing in cryptocurrencies, especially given the extraordinary level of speculation and volatility in many crypto markets. Nonetheless, crypto has an impact across capital markets, and our research in this space will continue to intensify.
We recently held an internal forum on cryptocurrency with several investors from across our Multi‑Asset, Fixed Income, and Equity divisions, along with members of our technology and trading teams. This was done in true T. Rowe Price collaborative fashion: We discussed and debated the tough questions, such as the relative merits and applications of the underlying technologies involved, market sentiment, and how to value cryptocurrencies.
We continue to discuss whether cryptocurrencies might eventually have a place in select portfolios and for a limited set of investors. While this debate will continue, we all agree that we are witnessing the developing stages of a transformative technology.
A Transformative Technology
Generally, our experts agree that cryptocurrencies are unlikely to soon supplant traditional currencies in most retail transactions, particularly in large, developed markets. Decentralized systems are inherently slower, and one of our technology analysts observes that Bitcoin and others have had difficulties in scaling up. However, trust in centralized currencies is eroding in many emerging markets, and recent signs of inflation are encouraging more interest in crypto alternatives.
Privacy concerns and the freedom from government control are also driving interest in cryptocurrency. As one of our international economists puts it, “some people like owning something that no central authority can manipulate or devalue.” Of course, some users desire privacy to hide illicit activity but many others are simply attracted to a system that lies outside of government control.
Indeed, we are keeping a close eye on how governments are responding to the crypto revolution—although regulators are mainly still just “sharpening their pencils,” one of our analysts observes. Governments’ choosing to strictly regulate or even ban cryptocurrencies outright poses a risk to current investors, but clarity about regulations could also invite opportunities. Properly regulated cryptocurrencies could become less volatile and more environmentally sound. Recent ransomware attacks demanding payments in cryptocurrency are highlighting the issue for regulators.
Meanwhile, many central banks are also exploring developing their own digital currencies. Central bank digital currencies (CBDCs) may carry none of the privacy benefits of their counterparts, but they promise to promote financial inclusion—likely allowing the “unbanked” to conduct transactions using a smartphone or a digital card.
There are already some 1,000 different currencies in circulation, and a shakeout is likely inevitable, especially as we see the speculation in cryptocurrency investing as one sign of increasing speculation in markets. Yet, just as the implosion of prominent early dot‑coms didn’t doom the internet, the potential demise of any prominent digital tokens may not doom cryptocurrency. We expect the landscape to take years to unfold, and we are aware that the technologies and tokens that dominate the future may not even yet exist. Indeed, we find the growing diversity of cryptocurrencies as intriguing as opportunities in any single coin.
Given the ability of some virtual currencies to facilitate payments at relatively low fees, applications in banking, payment processing, and financial services are being vigorously pursued. This has already led to a growing adoption of cryptocurrencies for cross‑border payments, such as remittances.
Smart contract cryptocurrencies like Ethereum take it a step further by giving rise to decentralized finance (DeFi), which aspires to recreate the entire traditional financial ecosystem, including lending platforms and exchanges. DeFi’s main selling point is its strictly code‑based enforcement mechanism, which dispenses with the need for a centralized intermediary between transacting parties. Oracle cryptocurrencies, such as Chainlink, connect with the smart contract ecosystem by feeding it with real‑world data such as market prices—thereby enabling real‑world use cases for the smart contracts themselves.
The past few months have demonstrated that Bitcoin may not remain the dominant cryptocurrency. Our technology experts observe that other digital tokens have faster processing speeds, and the “proof of work” computing resources needed for Bitcoin mining are coming under scrutiny for their electricity usage and environmental impact. We are keeping an eye on alternative methods for ensuring chain integrity and how these may favor competing currencies. At the same time, as one of our experienced technology portfolio managers points out, there are significant network effects in crypto, as elsewhere in the digital world. Identifying the strongest systems will be key.
We expect there to be an investing opportunity for active managers who can better understand the longer‑term viability of certain currencies.
Directly investing in cryptocurrency may be appropriate for certain investors for a portion of their assets, though many caveats apply. Much is uncertain and the risks are very high; Bitcoin, for example, has had five crashes of 80% or more since its inception in 2009. Indeed, one of our fixed income leaders sees the rise of many cryptocurrencies as a symptom of heightened speculation in markets, fed in turn by fiscal and monetary policies that have created an environment where more money is chasing fewer investments.
Whatever the risks and opportunities presented by crypto, its very size—about USD 1 trillion, and currently around that of the emerging markets corporate debt market—makes the case for treating it seriously as an asset class. Whether cryptocurrencies have any inherent value is something we are still debating internally, as is whether we could bring the strength of our global investment research team to bear on any analysis of that value.
What we can do, however, is to draw on our diverse perspectives on which currencies and technologies have the best chance to survive. For example, will digital tokens emerge with all the benefits stemming from the distributed ledger technology but also with a negligible environmental footprint and improved processing speeds? And will so‑called “stablecoins” with a set value solve the problem of volatility and become widely accepted? Or will CBDCs come to dominate, and what does that augur for the global financial system?
These are highly complex questions, and we are glad to be able to draw on a wide range of technological and investment expertise to seek the answers.
This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.
The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.
Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.
The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. It is not intended for distribution to retail investors in any jurisdiction.
Australia—Issued in Australia by T. Rowe Price Australia Limited (ABN: 13 620 668 895 and AFSL: 503741), Level 50, Governor Phillip Tower, 1 Farrer Place, Suite 50B, Sydney, NSW 2000, Australia. For Wholesale Clients only.
Brunei—This material can only be delivered to certain specific institutional investors for informational purpose upon request only. The strategy and/or any products associated with the strategy has not been authorised for distribution in Brunei. No distribution of this material to any member of the public in Brunei is permitted.
Canada—Issued in Canada by T. Rowe Price (Canada), Inc. T. Rowe Price (Canada), Inc.’s investment management services are only available to Accredited Investors as defined under National Instrument 45‑106. T. Rowe Price (Canada), Inc. enters into written delegation agreements with affiliates to provide investment management services.
China—This material is provided to specific qualified domestic institutional investor or sovereign wealth fund on a one‑on‑one basis. No invitation to offer, or offer for, or sale of, the shares will be made in the People’s Republic of China (“PRC”) (which, for such purpose, does not include the Hong Kong or Macau Special Administrative Regions or Taiwan) or by any means that would be deemed public under the laws of the PRC. The information relating to the strategy contained in this material has not been submitted to or approved by the China Securities Regulatory Commission or any other relevant governmental authority in the PRC. The strategy and/or any product associated with the strategy may only be offered or sold to investors in the PRC that are expressly authorized under the laws and regulations of the PRC to buy and sell securities denominated in a currency other than the Renminbi (or RMB), which is the official currency of the PRC. Potential investors who are resident in the PRC are responsible for obtaining the required approvals from all relevant government authorities in the PRC, including, but not limited to, the State Administration of Foreign Exchange, before purchasing the shares. This document further does not constitute any securities or investment advice to citizens of the PRC, or nationals with permanent residence in the PRC, or to any corporation, partnership, or other entity incorporated or established in the PRC.
DIFC—Issued in the Dubai International Financial Centre by T. Rowe Price International Ltd. This material is communicated on behalf of T. Rowe Price International Ltd. by its representative office which is regulated by the Dubai Financial Services Authority. For Professional Clients only.
EEA ex‑UK—Unless indicated otherwise this material is issued and approved by T. Rowe Price (Luxembourg) Management S.à r.l. 35 Boulevard du Prince Henri L‑1724 Luxembourg which is authorised and regulated by the Luxembourg Commission de Surveillance du Secteur Financier. For Professional Clients only.
Hong Kong—Issued in Hong Kong by T. Rowe Price Hong Kong Limited, 6/F, Chater House, 8 Connaught Road Central, Hong Kong. T. Rowe Price Hong Kong Limited is licensed and regulated by the Securities & Futures Commission. For Professional Investors only.
Indonesia—This material is intended to be used only by the designated recipient to whom T. Rowe Price delivered; it is for institutional use only. Under no circumstances should the material, in whole or in part, be copied, redistributed or shared, in any medium, without prior written consent from T. Rowe Price. No distribution of this material to members of the public in any jurisdiction is permitted.
Korea—This material is intended only to Qualified Professional Investors upon specific and unsolicited request and may not be reproduced in whole or in part nor can they be transmitted to any other person in the Republic of Korea.
Malaysia—This material can only be delivered to specific institutional investor upon specific and unsolicited request. The strategy and/or any products associated with the strategy has not been authorised for distribution in Malaysia. This material is solely for institutional use and for informational purposes only. This material does not provide investment advice or an offering to make, or an inducement or attempted inducement of any person to enter into or to offer to enter into, an agreement for or with a view to acquiring, disposing of, subscribing for or underwriting securities. Nothing in this material shall be considered a making available of, solicitation to buy, an offering for subscription or purchase or an invitation to subscribe for or purchase any securities, or any other product or service, to any person in any jurisdiction where such offer, solicitation, purchase or sale would be unlawful under the laws of Malaysia.
New Zealand—Issued in New Zealand by T. Rowe Price Australia Limited (ABN: 13 620 668 895 and AFSL: 503741), Level 50, Governor Phillip Tower, 1 Farrer Place, Suite 50B, Sydney, NSW 2000, Australia. No Interests are offered to the public. Accordingly, the Interests may not, directly or indirectly, be offered, sold or delivered in New Zealand, nor may any offering document or advertisement in relation to any offer of the Interests be distributed in New Zealand, other than in circumstances where there is no contravention of the Financial Markets Conduct Act 2013.
Philippines—THE STRATEGY AND/ OR ANY SECURITIES ASSOCIATED WITH THE STRATEGY BEING OFFERED OR SOLD HEREIN HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES REGULATION CODE. ANY FUTURE OFFER OR SALE OF THE STRATEGY AND/ OR ANY SECURITIES IS SUBJECT TO REGISTRATION REQUIREMENTS UNDER THE CODE, UNLESS SUCH OFFER OR SALE QUALIFIES AS AN EXEMPT TRANSACTION.
Singapore—Issued in Singapore by T. Rowe Price Singapore Private Ltd., No. 501 Orchard Rd, #10‑02 Wheelock Place, Singapore 238880. T. Rowe Price Singapore Private Ltd. is licensed and regulated by the Monetary Authority of Singapore. For Institutional and Accredited Investors only.
South Africa—T. Rowe Price International Ltd (“TRPIL”) is an authorised financial services provider under the Financial Advisory and Intermediary Services Act, 2002 (FSP Licence Number 31935), authorised to provide “intermediary services” to South African investors.
Switzerland—Issued in Switzerland by T. Rowe Price (Switzerland) GmbH, Talstrasse 65, 6th Floor, 8001 Zurich, Switzerland. For Qualified Investors only.
Taiwan—This does not provide investment advice or recommendations. Nothing in this material shall be considered a solicitation to buy, or an offer to sell, a security, or any other product or service, to any person in the Republic of China.
Thailand—This material has not been and will not be filed with or approved by the Securities Exchange Commission of Thailand or any other regulatory authority in Thailand. The material is provided solely to “institutional investors” as defined under relevant Thai laws and regulations. No distribution of this material to any member of the public in Thailand is permitted. Nothing in this material shall be considered a provision of service, or a solicitation to buy, or an offer to sell, a security, or any other product or service, to any person where such provision, offer, solicitation, purchase or sale would be unlawful under relevant Thai laws and regulations.
UK—This material is issued and approved by T. Rowe Price International Ltd, 60 Queen Victoria Street, London, EC4N 4TZ which is authorised and regulated by the UK Financial Conduct Authority. For Professional Clients only.
USA—Issued in the USA by T. Rowe Price Associates, Inc., 100 East Pratt Street, Baltimore, MD, 21202, which is regulated by the U.S. Securities and Exchange Commission. For Institutional Investors only.
© 2021 T. Rowe Price. All Rights Reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc.