More and more wealth managers are looking to include BTC in their portfolios.
London: 2020 is already off to an eventful start. From Brexit to the US Presidential primaries, to the ongoing coronavirus outbreak across the globe, our news cycles are dominated by change, possibility, and some turmoil as well. Momentous times can lead investors to consider the state of their portfolio, and in these times of change, many are looking to Bitcoin (BTC) as an important part of their fully diversified portfolio. When one looks at the risk-adjusted returns of BTC compared to US stocks and US real estate, using the Sharpe ratio, it is not hard to see why more and more wealth managers are looking to include BTC in portfolios.
Risk Adjusted Returns for Bitcoin, US Stocks and US Real Estate
As recently as two years ago, this idea would have been laughable. The rollercoaster ride of 2018 discouraged most investors from taking BTC and other digital assets seriously. We’ve been still seeing volatility in the market, but with an upwards trend rather than downwards. It seems that we’ve already seen the bottom of the cycle, and BTC is exhibiting qualities that are causing institutions, regulators, and investors to reconsider their initial judgement of cryptocurrency. Institutions like JP Morgan are finding that more of their clients are interested in this new asset class (like BTC) with JP Morgan having recently released a report titled: “Blockchain, digital currency and cryptocurrency: Moving into the mainstream”?
The case for BTC
Even whilst writing this, BTC is sitting at an impressive 33% YTD return and a one-year performance of 150%! BTC’s Sharpe ratio is above 1, making it the highest in its asset class. It’s no wonder that the more traditionally-minded investors are considering BTC’s potential value as part of their portfolio in 2020 and beyond.
In a simulated portfolio, a portfolio which had 57% equities and 40% bonds, with the addition of 3% BTC, showed a cumulative total return of 144.9% from 31 December 2012 to 31 December 2019. This was compared with a cumulative total return of 93.5% in a portfolio of 60% equities and 40% bonds, across the same time period.
Institutions have already demonstrated their belief in BTC by offering crypto derivatives. As early as 2017, CME and CBoE launched their BTC derivatives, which have since taken off. Such offerings were developed even earlier within the crypto industry itself, but adoption by more mainstream institutions is a strong indicator of shifting attitudes. Over all, open interest in crypto derivatives across all platforms is at an all-time high of over $5Billion.
Potential concerns and challenges for Investors
Risk-averse investors may still find some concerns which prevent them from including BTC in their portfolio. While the crypto market has calmed down, it still exhibits a strong degree of volatility. One way to get exposure to BTC and make the volatility of this asset work for you is to regularly place the same amount every week and thus take advantage of pound cost averaging. Pound cost averaging enables one to buy more of an asset when the price is low, and less when the price is higher, each month. Over the last three years, this strategy would mean that £10 saved into Bitcoin each week, since February 2017, would now be worth £3,474—representing a rise of 120.68%. By investing £10 into the Dow Jones Index each month, the investment would have grown to be worth £1,847—a rise of 17.7%. If you would like to do your own calculation based on different amounts over various time periods, use this link.
We are seeing more crypto-friendly regulators propose sensible regulation to allow for investment and innovation within the Blockchain industry. SEC Commissioner, Hester Peirce (aka Crypto Mom), has suggested legislation that would, for instance, allow more flexibility for ICOs.
On the other hand, some are still cautious (or even downright dismissive) of cryptocurrency, such as when the president of the Federal Reserve Bank of Minneapolis, Neel Kashkari, called crypto a “giant garbage dumpster.” Such regulatory and institutional resistance can leave some investors hesitant to commit their funds to this asset class.
The value of saving £10 a week into Dow Jones Index compared to saving £10 a week into Bitcoin, from Feb 2017 to Feb 2020
An additional challenge comes in the form of scams and bad business practices. Potential investors must be careful to do their due diligence on any exchange platform or digital wallet where they choose to store their cryptocurrency. Likewise, they should be sure to understand the best practices for securing their Digital Assets. Some investors may find that they feel more confident trusting an institutional solution such as Fidelity Digital Assets.
What does the future hold?
No-one can say with certainty what markets or regulators will do although On Yavin, who is CEO and co-founder of Cointelligence, has recently told me, “I, for one, am optimistic about the future of BTC and Digital Assets. And I’m not alone in this—Gartner and Deloitte have both predicted that Digital Assets will continue to grow into a multi-trilliondollar industry. In mid 2019, Gartner’s projections suggested that Blockchain would “deliver 3.1 trillion dollars in value by 2030.”
Undoubtedly, education is a key requirement that investors need in order to understand more about this new asset class. This is particularly important now as more and more investors rely on their own research and less and less of financial advisers, who in many cases are “not up to speed” themselves. Yavin has been surprised at the interest generated both for Cointelligence online, as well as its attendance courses, which have had over 6,000 people registering since September 2019. This clearly demonstrates the thirst there is for more information and education. Surely this has to be a good thing, sifting the myths from the reality and giving investors the knowledge and tools that are going to be required? In turn, the actions of major corporations back up this prediction. From Facebook’s Libra project, to both JPMorgan and Visa using Blockchain-based payment solutions, to Walmart using Blockchain for supply chain tracking, we are seeing more and more businesses embracing the possibility of both Blockchain and Digital Assets. Other businesses are sure to follow suit, simply out of fear of being left behind.
Virgin Galactic CEO, Chamath Palihapitiya, thinks investors ought to put a small percentage of their net worth into Bitcoin as “insurance”. “I think a reasonable strategy is to say 1% of my net worth should be in something completely uncorrelated to the world and how the world works. You quietly over some time accumulate a position and then just never look at it again and hope that that insurance under the mattress never has to come due. But it is does, it will protect you”. This is not a particularly surprising statement since Virgin Galactic has previously demonstrated its belief in crypto by accepting Bitcoin as a form of payment for its space flights since 2013!
Six years ago, cryptocurrency was the domain of “computer nerds”. Two years ago, it was seen as the basis of “get-rich-quick” schemes. But in 2020, we are seeing more and more institutional engagement, steps towards mass adoption and worldwide acceptance. As cryptocurrency grows and matures as an asset class, BTC is likely to become an increasingly important part of every investor’s portfolio. This can be seen in the fact that Grayscale reported $600M in investments in its digital asset investment products in 2019, much of which came from institutions and hedge funds.
Institutions and individuals alike are sitting up and taking notice of BTC. Digital Assets are moving away from the fringe and into the mainstream, finally getting the respect they deserve. Of all the changes that 2020 has brought and will continue to bring, this may be one of the most exciting and positive.
Jonny Fry is CEO, TeamBlockchain Ltd