Cryptocurrencies have become a hot topic in recent months with market experts divided on whether the digital asset is a good investment or not.
Cryptocurrencies are digital currencies built on a blockchain. This element means they are decentralised from central banks, an appealing aspect both now and when they first emerged post 2008 global banking crisis. This system allows a permanent record of all transactions and supposedly makes it harder to counterfeit.
Bitcoin is the oldest and most well-known cryptocurrency. It has attracted a mass of headlines in the past year, especially after Tesla bought $1.5bn in bitcoin last year and began accepting it as payment.
It has also seen a massive increase in investment and returns. Indeed, staying on Tesla it’s reported that the car manufacturer has made more money from its bitcoin investment than the $721m in profits made from selling cars in the whole of 2020.
Performance of bitcoin over 1yr
Source: Coinbase
But there are thousands of different cryptocurrencies, including ethereum (ETH), tether and recently dogecoin.
Cryptocurrencies have been hailed by some investors as the new gold as a hedge against inflation, which has been an especially popular angle in recent months as inflation concerns grow.
But others have stayed away for a variety of reasons, ranging from lack of understanding to believing it’s just a pyramid scheme.
Below, Trustnet asks WisdomTree’s Florian Ginez and Kingswood’s Rupert Thompson whether cryptocurrencies are an appropriate asset for mainstream portfolios.
BULL: There are several reasons to consider cryptos
Making the case for cryptocurrencies is Florian Ginez, associate director, quantitative research at WisdomTree.
Ginez (pictured) sees several reasons why cryptocurrencies could be useful assets to a portfolio, not limited to adding diversity when it comes to risk management.
“Digital assets can be worth considering for several reasons. The first reason is portfolio diversification and potential enhancement of the risk-adjusted profile. The asset class shows a correlation close to zero with most other asset classes, from traditional assets like equities and bonds, to alternative asset classes like infrastructure, commodities or hedge fund strategies. From that perspective, investors could consider whether digital assets make sense in the context of their portfolios,” he said.
“The second possible advantage is upside potential. As a young technological development, blockchain in general appears to provide some growth opportunities, whether through investing in digital coins, tokens, listed blockchain companies or venture capital investments. In a low yielding environment, investors are looking for ways to generate return, and this asset class represents a new opportunity for doing so.
“Digital assets represent an opportunity to participate in the next internet revolution. We are witnessing exponential growth in many services which are getting their decentralised, blockchain-based version, spearheaded by the decentralised finance (DeFi) ecosystem. Funding is strong, as the space attracts a lot of capital, even from some of the most prominent figures in traditional finance. This has helped the ecosystem to develop significantly over the past few years, and this is likely to keep accelerating.
“Growth in adoption from institutional investors has also been accelerating significantly since the middle of 2020. More sophisticated investors are getting exposure to the asset class, increasing demand for digital assets, which supports the bullish case going forward. The development of new products, such as exchange traded products (ETPs), brings easier ways to obtain safe exposure for investors. European and Canadian ETPs have been successful, and hint to the demand that US exchange traded funds could witness when approved.
“A well-funded ecosystem is developing a strong, institutional-grade infrastructure around digital assets. This gradually is leading to more acceptance from regulators and the traditional investment world, who are working to integrate digital assets. This could present the case for further growth and adoption in the future.”
BEAR: “The claims for crypto are big but their failings are even bigger.”
Rupert Thompson (pictured), chief investment officer at Kingswood, outlined why he’s not a fan of cryptocurrencies and how they’re not a seamless replacement for gold when it comes to hedging inflation.
“Cryptocurrencies have many similarities to a religious cult, attracting both devout believers and diehard sceptics. The claims for crypto are big but their failings are even bigger,” he argued.
“Their most obvious drawback is their extreme volatility and is reason for keeping them well away from any mainstream investment portfolio. The sharp declines of a couple of weeks ago drew much attention but are really just a continuation of crypto’s long term rollercoaster ride. The boom/bust seen in 2020/21 has been no more than a re-run of 2013/14 and 2017/18.
“Cryptos have been touted as gold for the digital age but in reality are no such thing. Gold has been a store of value for thousands of years rather than a mere decade. With assets of little intrinsic worth where value is in the eye of the beholder, history brings much needed credibility.
“Cryptos may be limited in supply like gold but this is not sufficient on its own to create value.
“Unlike gold, cryptos have failed to provide protection either against a big risk-off move or rise in inflation. Bitcoin lost as much as 50 per cent of its value in the Covid sell-off and its recent plunge has occurred as inflation worries have been increasing.
“As for the long-term future for cryptos, who knows. But what one does know is that some big players are now doing their best to limit their success. The authorities in China and the US are both tightening the regulatory screws. Environmental concerns are also very much on the rise due to the massive energy consumption of some cryptos, particularly bitcoin.
“The bottom line is that including cryptos in a portfolio is no more than a matter of faith. As yet, the hard evidence points to them being little more than an undesirable source of risk.”