Ruffer decided to exit its short-lived position in bitcoin earlier this year after the cryptocurrency started to look too much like “a risky, speculative asset”, the investment boutique has revealed. 
In November 2020, the firm established a $744m “defensive” position in bitcoin across several of its portfolios. This included a 2.5 per cent position in Ruffer Investment Company, which funded this by trimming its allocation to gold.
“We see this as a small but potent insurance policy against the continuing devaluation of the world's major currencies,” Ruffer Investment Company’s managers said at the time.
“Bitcoin diversifies the company's (much larger) investments in gold and inflation-linked bonds, and acts as a hedge to some of the monetary and market risks that we see.”
However, the firm then took some profits over December and early January when the cryptocurrency doubled in price, before selling its last bitcoin holdings in April. In all, Ruffer made a profit of more than $1.1bn through the investment.
Performance of bitcoin since May 2020
Source: Ruffer
In a recent update, Ruffer investment director Duncan MacInnes has offered further insight into the investment house’s decision to initially buy bitcoin then to sell out after just four months.
“Asset allocators today face two existential, and interlinked, questions: firstly, is inflation making a generational comeback, and secondly, is the balanced portfolio dead? These are multi-trillion dollar questions. And if the answer to either question is yes, what do you do with your bonds?” he said.
“The implications for conventional balanced portfolios are profound and painful. Bond yields rise, so bond prices fall. Equities de-rate, so equity prices fall. Worse, the two asset classes become positively correlated which is the opposite of the last 40 years. In crypto speak, you get ‘rekt’ (wrecked).”
One solution to this problem is to move away from bonds and towards real assets that offer the potential for inflation protection. Examples include gold, inflation-linked bonds, property, infrastructure and commodities – each of which has its own strengths and weaknesses.
MacInnes pointed out that some consider bitcoin to fit into this category, viewing it as “an improvement on gold” and a real asset that is perfectly suited to the new digital world. He said Ruffer made its investment in the cryptocurrency after seeing it as “an option on an emerging store of value with a highly skewed and attractive risk/reward profile”.
“We invested recognising bitcoin is an environmental riddle, wrapped in a genesis mystery, inside not an enigma, but a paradox: for bitcoin to succeed it must first betray its spiritual foundations and be co-opted by Wall Street and blessed by the authorities,” he added.
Ruffer still holds these views on bitcoin, but one thing that changed dramatically during the months it held the stake was the price. As the chart above shows, bitcoin shot up in value last year, before slumping shortly after Ruffer sold.
“It all has a flavour of the late 1990s. At the heart of any mania there is at least a kernel of truth. A lot of crazy things happened in the dot.com bubble, but the internet did change the world, the promise was fulfilled,” the investment director said.
“In 2021, the excitement is in crypto currencies and decentralised finance. The promise is real. But so too is the surge in excess liquidity generated by fiscal stimulus and ongoing quantitative easing.”
To Ruffer, it looked like excess liquidity was peaking in April, as the second round of US stimulus cheques landed in an economy that was still largely closed. Many stimulus cheques ultimately made their way into the market as retail investors poured them into their portfolios during lockdown, with bitcoin being one of the best-known beneficiaries of this.
“Bitcoin may yet fulfil its potential, but peak liquidity coincided with many signs of froth – retail speculation, record leverage in the financial ecosystem, the Coinbase IPO, Tom Brady’s laser eyes, Dogecoin, Elon Musk hosting Saturday Night Live, $60m non-fungible tokens etc,” MacInnes said.
“In the short term at least, bitcoin was exhibiting the characteristics of a risky, speculative asset and therefore no longer fulfilled the role we wanted it for as a portfolio protection and diversifying asset. We sold all of our exposure.”