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The birth of an asset class

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By A Paris – Some say you should never resist the unfamiliar, but until recently, the institutional investor market has staunchly resisted considering cryptocurrencies and digital assets to be an asset class of their own. But as large institutions like insurer Mass Mutual investing in Bitcoin and asset management behemoth, BlackRock filed for two of its funds to invest in the crypto asset, the outlook for digital investments to be classed as an asset class in and of themselves is looking more positive.

A research paper by academic Asheer Jaywant Ram concludes: “Bitcoin represents a distinct alternative investment and asset class. There are significant opportunities for investment. The politico-economic profile of the decentralised and consensus-based Bitcoin is dissimilar to other asset classes. The Bitcoin shares little or no correlation with other asset classes. Using Sharpe ratios, it is shown that the Bitcoin provides risk-adjusted returns over and above most asset classes.”

Managers and industry participants echo this, having witnessed a change in attitude on behalf of investors.

“Increasingly, investors are accepting Bitcoin as a new asset class – the emergence of which is one simple reason to participate – it’s really rare to see a new asset class coming to market,” outlines James Butterfill, investment strategist, CoinShares.

Brett S Messing, chief operating officer, Skybridge, agrees: “We think this is a tipping point in terms of adoption. Bitcoin is being embraced as an acceptable asset class and we’re seeing interest from hedge funds, mutual funds, endowments, pension funds and insurance companies. Across our own various products and funds, we have about USD400 million in Bitcoin.”

In fact, the notoriously volatile Bitcoin market experienced a rally in early 2021, which according to PwC’s crypto leader Henri Arslanian “was partly driven by the entry of more big, institutional investors into the market.” 

Messing notes how a few of each institution type have now committed to buying Bitcoin – this includes insurance companies, endowments and pension funds: “We’re not yet at that place where you have to own it. But we’re headed in that direction. There’s a long time to go before all institutional investors will allocate to Bitcoin, but it seems unlikely that these big players buy it and others don’t follow suit.”

Performance argument

Just considering the meteoric rise of Bitcoin in just 12 years, could be a convincing argument for an allocation to cryptocurrencies. Harsh Jani, business development, Iconic Holding, writes: “Since inception, Bitcoin has been among the best performing assets of the past decade, if not the very best. 

“Without a CEO, marketing team, or any central company behind it, Bitcoin has managed to appreciate from effectively having USD0.00 in value to an all-time high value of roughly USD20,000. Its market cap, at peak values, exceeded USD250 billion and currently sits over USD100 billion.”

Andrea Leccese, president and portfolio manager, Bluesky Capital details: “When you look at performance there is definitely a very good case for crypto being part of institutional portfolios. It’s uncorrelated to traditional asset classes, most of the time. So, a crypto addition to a portfolio is a valuable proposition, especially if it is actively managed by a professional investor like us; we can go long-short and capture opportunities in both bull and bear markets.”

Leccese and his team conducted a study on the performance of Bitcoin, concluding that small allocations to the asset provide greater risk-adjusted returns compared to portfolios without an allocation to Bitcoin. “During our study’s time frame, adding Bitcoin to a traditional 60/40 portfolio increases the portfolio’s Sharpe ratio significantly. Similar benefits are also observed in portfolios with different sizes of Bitcoin allocation. Investors could benefit tremendously from including Bitcoin in their portfolios, making them more diversified and more resilient to risk”, they noted.

Another catalyst for the growing institutionalisation of the digital assets market is the lack of yield in traditional asset classes, leaving investors are still looking for alternative sources of return.

Crypto safe haven

Messing comments: “Interestingly, macro investors and fixed income investors have embraced Bitcoin. If you’re running a pension or an insurance company, you have targeted rates of returns you have to meet to satisfy financial obligations. Buying fixed income at a 10-year rate of 1 per cent or high yield at 4.25 per cent isn’t particularly attractive. Which is why they’re looking at a small allocation to Bitcoin. If they take it out of their fixed income portfolio, which is already yielding less than its target, then it cannot exacerbate the problem they already have, even if it doesn’t perform as expected.”

From the perspective of Bradley Duke, CEO of ETC Group: “Choosing to not engage with the Bitcoin opportunity could be problematic for asset managers and asset owners. They have a duty to their shareholders to deliver a return and protect the value of the money that has been entrusted to them. Seizing this opportunity and allocating some of the assets to Bitcoin or digital assets borders would be considered diligent in this respect.”

In addition, as global economic uncertainty due to the coronavirus pandemic persists, institutions are looking for safe haven, store of value assets. Historically, gold has played this role in portfolios but there is growing scope for Bitcoin to also support this objective.

Christopher Bendiksen, head of research, CoinShares lays out the reasons for this: “Conceptually, because of its fixed supply and being priced in dollars, theoretically Bitcoin can act as an inflation hedge. The asset has a very predictable supply curve and a finite supply, which remains immutable as the network grows. It’s driven by an algorithm which is transparent, this arguably makes it more robust than the decision making in a central bank because it is not controlled by humans. As people start to understand this, then they start to see actually how Bitcoin and digital assets might have a place in a portfolio.” 

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