Bitcoin: from a digital currency to an emerging alternative asset

A currency without a border, Bitcoin is everywhere, an asset belonging both to everyone and no one.

In May, bitcoin surged by more than 900% since its collapse one year ago. After its recent falls, it is now trading at half that price, according to The Times. Yet, bitcoin’s role as a viable yet volatile alternative asset class that behaves differently from stocks and bonds has left the investment community and portfolio and wealth managers scrambling to own cryptocurrencies if they can.

Big pushes towards digital currencies, in general, are happening among bigtechs, fintech, and central banks. Facebook is working with its own digital currency project launch, and most recently PayPal allowed its users to trade and custody cryptocurrencies. In China, citizens are already using WeChat or Alipay digital payment applications for most everyday payments and purchases. 

More and more users are jumping into the digital currency markets as a result, with a Cambridge University study finding that the number of unique cryptocurrency users on verified exchanges rose globally from 35 million in 2018 to 101 million as of Q3 2020.

However, most advisors are still unable to own any bitcoin for their clients until it can be held in an exchange-traded fund or mutual fund that meets any legal requirements for any investment. Securities regulators in Canada approved the world’s first bitcoin ETF in February 2021, giving investors hope that U.S. regulators will follow suit shortly. Institutional money would push the asset class even higher if it’s allowed to flow in. In Europe vice versa, we have had Exchange Traded Products tied to bitcoin and other cryptocurrency exposure already for years, and available options are increasing all the time.

Bitcoin’s advantages can’t be ignored by asset managers

Market accessibility and maturity will shape the behavior of bitcoin in relation to other assets further. Now investors can buy and sell direct bitcoins or derivatives on standard investing applications, or in traditional derivatives markets like CME and in PayPal. Bitcoin could become even more correlated (positively or negatively) with other assets as bitcoin markets, and traditional markets overlap increase. 

Financial and wealth management firms need to step up and recognize that they are denying the best performing asset of the decade, bitcoin, to their investors.

Despite crypto exploding in recent months, the platforms that track your accounts and net worth have been fairly slow to adopt and adapt to new technologies. Cloud-based, multi-asset class platforms that enable institutional investors to evaluate risks and profits, compare cryptocurrencies’ value development to other asset classes such as stocks, bonds, funds, or different cash forms (currencies), and also reporting and following the consequences and correlations of these different asset classes, are extremely important.

Helicopter money

What about the investors’ ability to trust and believe in central banks and their ability to control the finance market including state finances and public economies? Bitcoin has proved well that there is a lack of trust in the current dominating finance system, for example, we can have conflicting opinions on whether the so-called helicopter money is a good option or not, and where will this all lead to?

It’s already clear that the extraordinary liquidity measures taken by central banks globally, and especially in the western economies like the U.S. and Europe, are resulting primarily in further asset inflation, but more recently also in consumption-based economic activity (CPI). The great monetary debasement of the traditional safe-haven asset like the U.S. dollar will logically lead investors to analyze alternative assets like cryptocurrencies in order to curb guaranteed losses in their cash and cash equivalent positions short term and in the future.  

Seeking the optimal risk & return exposure

The annualized returns of portfolios with an incrementing allocation to bitcoin have historically outperformed portfolios with no allocation to bitcoin over any time horizons displayed by various studies like Fidelity, ending in September 2020. The study suggests that even volatility is somewhat elevated for portfolios with bitcoin allocation, and the increased risk effect was less than the increase in returns, resulting in better risk-adjusted returns. 

Crypto’s role in finance is growing, but the technology is still new, and there are hurdles to clear – as the industry moves forward, asset managers can no longer ignore the inherent benefits of turning towards new asset classes for their clients but a speculative and risk-managed approach is key to ensuring safety and success in still a fairly deregulated market.

This article was written in cooperation with Hannes Helenius, Partner at FA Solutions, and Joonas Järvinen, Chief Investment Officer at Coinmotion.

More information:

Hannes Helenius
FA Solutions
+358 40 146 7760

Joonas Järvinen
Chief Investment Officer
+358 40 836 0378

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