Balmoral Asset Management director Angus Crennan is a trailblazer in the Australian investment community.
He might be the first fund manager in the country who shut down his global shares fund then immediately launched a new digital assets investment product.
"We're all in on digital assets," he told The Motley Fool.
"There's 300 million digital assets users now. We fully expect that to be a billion by 2026. This is like double the speed of the uptake of the internet."
While many of his former clients have been keen to jump into the world of cryptocurrencies, non-fungible tokens and the like, some are more conservative.
They worry about the risks that have been mentioned in financial media for many years.
Crennan reckons that those anxieties, while reasonable to have, are overblown.
"It's dispelling some of these misconceptions and these legacy issues that people are worried about," he said.
"They're very valid concerns. It's just that the technology and the evolution in this space means that they're being addressed."
He picked out 3 of the biggest stereotypes about digital assets and explained why they're untrue:
Myth 1: Crypto is used by criminals
Some old clients have expressed concern about how cryptocurrencies can be used by crime groups or terrorist organisations to launder their money.
Crennan admitted the anonymous nature of blockchain technologies, on which crypto and NFTs are implemented, might have meant criminals could hide many years ago.
But the whole point of blockchain is that the entire ledger is publicly viewable, and there are now third-party services like Chainalysis that track every transaction.
"They increasingly map the blockchains, and that's really developing AML [anti-money laundering] within this digital ecosystem," he said.
"If you think of a bank's database of who owns what, that's unique to the bank — Whereas the blockchain is publicly available. Everyone can see it. So that concern around AML and terrorism financing, there's very valid arguments that's actually a lot more overblown than people realise."
Myth 2: Crypto destroys the environment
Another concern Crennan hears is how cryptocurrencies like Bitcoin (CRYPTO: BTC) are not environmentally friendly, as the computers that mine the coins and administer the network require huge amounts of energy.
The fund manager admitted Bitcoin itself is problematic as it uses a "proof of work" system to administer its blockchain. But most currencies implement transactions on a "proof of stake" basis, which are far more efficient.
"Proof of work is kind of like, imagine 10 people starting a race and running all the way to the end of the race, but only one of them is allowed through the gate. So then the other 9 runners have to go back to the start, and all that energy and time is wasted," he said.
"Whereas most of the cryptocurrencies operate on a proof of stake basis and what happens there is that there's a selection process of who's going to do the reconciliations. What that means is modern cryptocurrencies like Solana (CRYPTO: SOL) use less energy to do a transaction than it does to do a Google search."
Myth 3: Risk management is impossible for digital assets
Retail investors often hear of the wild volatility involved in crypto and digital assets.
Crennan would dispute the myth that risk management is impossible with a digital-only investment portfolio.
Firstly, he pointed out that the risks inherent in digital are not different to ones present in traditional investments.
"I'd add that it doesn't matter what type of investing you do, you're going to have counterparty and cyber risk," he said.
"Even if you are using Macquarie Group Ltd (ASX: MQG) as your broker. It is feasible that Macquarie Group could cease to exist, right?"
Second, Crennan insisted he's very careful about the choice of exchanges he uses.
"Some of the things that we look at are things like, how are their algorithms going to work to protect us?" he said.
"Has that exchange ever had a liquidation event where the lender has not been able to get their money back, or the counterpart has not been able to get their money back? We look at their infrastructure."
The Balmoral team also assesses how the exchange meets industry standards for cybersecurity and systems design.
"Do they hold everything in cold wallets? This is really important. Have they passed multiple security audits?
"Do they have an active bug bounty program where they employ white hat hackers scoping their systems for vulnerabilities on a consistent basis? And then also we look at the liquidity."
