Tag Archives: investment

Sovereign Wealth Funds: Building intergenerational equity

Image source: institutionalinvestor.com
Image source: institutionalinvestor.com

 

It was in the early 1950s when the Kuwait Investment Authority established the world’s first sovereign wealth fund (SWF) as a way for the Gulf state to diversify its investments, anchored largely by its excess revenues from oil. With its primary role as a practical solution for a nation with a budgetary surplus, it has been later on adapted and created by other resource-rich and export-orientated sovereignties.

SWF is a resource that helps stabilize a country’s economy. In definition, it is a government-owned fund allotted in investing into various financial assets for two main purposes: to gather savings for the country’s future generation, and the diversification of their total income base.  This is a more practical approach in order to take advantage of a nation’s excess money, funneling it into investments than just letting it stay idle in the central bank.

Sovereign wealth funds are classified depending on how they are financed: commodity and non-commodity.  Commodity SWFs are primarily created by revenue surpluses from exporting major commodities such as oil, metallic ores, and diamonds; the latter, meanwhile, is usually funded by an excess of foreign currency reserves from current account surpluses.

Many countries establish SWF and are motivated by different economic and political circumstances. One example is how the United Arab Emirates create a huge part of their funds from their oil exports. Because of this, they need a reliable solution to protect the surplus reserves from oil-based risks and this is where SWF does its work—allowing the country to sustain or even accumulate more profits.

In the age of globalization, SWFs have been proven to contribute in developing assets in need of a substantial capital.  Because of its unique characteristics and its long-term benefits, countries around the world can create a brighter economic future for their citizens and the generations to come.

Wallet in the cloud: The rise of the Bitcoin cryptocurrency

The United States has the dollar, Japan has the yen, while the Internet has Bitcoin. It is a computer program that acts as a unit of account or payment system that only exists in the digital world. Therefore, it is not minted from metal or printed on paper, which is always the case for real currencies. Its monetary value is completely virtual.

 

Bitcoin is the very first example of a growing trend known as cryptocurrency. During its infancy (c. 2008), there were a lot of negative speculations about it, including its authenticity as an acceptable monetary unit. However, nearly a decade since its creation, it has become a popular way to ‘buy’ goods or services. In fact, for the first time since its birth, the value of 1 Bitcoin has already eclipsed that of an ounce of gold.

 

Coin 1

Image source: coindesk.com

 

Bitcoins are basically ‘rewards,’ derived mainly by winning in a competition in which users—also known as miners—offer their computing power to verify business deals into the blockchain, which is a ledger or database that record all bitcoin transactions. As of February 2015, bitcoin is accepted as a payment method by over 100,000 merchants and vendors worldwide.

 

Early this month, the Internet currency was able to gain 3 percent, while the precious metal fell down by 1.3 percent. Looking at the progress data of both assets from a year ago, Bitcoin was able to nearly triple its value, while gold practically stayed at the same level. Both of them are alternative assets, though it is important to note that they aren’t usually traded in correlation.

 

Coin 2

Image source: bitcoin.org

 

Gold is practically the “gold” standard of all alternative assets. Investors usually use it as a hedge against potential losses from traditional assets such as stocks or real estate. That is why Bitcoin overtaking the valuable metal is notable since some predicted that the former would replace the latter as the preferred alternative asset. One can only speculate as to what could happen if ever the SEC approves of its listing.

 

Despite its remarkable rise in recent years, bitcoin is yet to truly prove itself as a viable and safe asset to be used in numerous transactions or even as a good addition to one’s investment portfolio. It cannot also be commoditized, unlike precious metals or crude oil. As such, bitcoin prices will tremendously suffer if the SEC does not approve a bitcoin ETF. Serious investors and investment managers will have to make extensive research before they can consider the virtual asset as something they could venture in.