Barclays Private Bank has concluded bitcoin is “almost uninvestable”, adding to scepticism over whether the cryptocurrency is a viable asset class for pension funds and other heavyweight investors to consider holding in portfolios.
Many institutional investors sat on the sidelines when bitcoin experienced its first dramatic rally in 2017, but some claim that they have been responsible for the latest sharp increase in valuation.
Bitcoin surged to a record high of $42,000 earlier this month before crashing to around $30,000. It now trades at around $37,000.
“While it is nigh on impossible to forecast an expected return for bitcoin, its volatility makes the asset almost ‘uninvestable’ from a portfolio perspective,” says Gerald Moser, chief market strategist at Barclays Private Bank.
“With spikes in volatility that are multiples of that typically experienced by risk assets such as equities or oil, many would probably throw the cryptocurrency out of any portfolio in a typical mean-variance optimisation.”
Billionaire hedge fund manager Paul Tudor Jones is one of the big-name investors known to have allocated money to bitcoin, while the SkyBridge Capital hedge fund set up by Anthony Scaramucci has filed with the US regulator to launch a bitcoin fund.
In a note on 12 January, Goldman Sachs said institutional adoption of cryptocurrencies like bitcoin and altcoins such as Ethereum would be “very gradual”.
But Moser said bitcoin is also a poor diversifier, and “seems to falter when diversification is most needed”, such as during sharp downturns in financial markets.
According to Moser, weekly return correlations since 2016 shows that bitcoin is not strongly correlated with any asset and that it had performed even worse than equities over the last three global equity corrections since 2015.
While investors would have benefited from some exposure to gold and fixed income assets during those corrections, Moser said bitcoin would have compounded losses.
READ Institutional investors’ take-up of crypto will be ‘very gradual’, says Goldman
He added that fluctuations experienced alongside equities suggest that investment in bitcoin is “more akin to a bubble phenomenon rather than a rational, long-term investment decision”.
“The performance of the cryptocurrency has been mostly driven by retail investors joining a seemingly unsustainable rally rather than institutional money investing on a long-term basis,” said Moser.
The markets strategist is the latest voice to cast doubt over increased investor appetite for bitcoin.
Adam Grimsley, an investment director within the private markets team at Aberdeen Standard Investments, told Financial News recently the idea that institutional investors were significantly driving up the price of Bitcoin is “a bit delusional”.
“This narrative of institutional investors increasing exposure is probably correct, but I don’t think it is anywhere near some of the anecdotal evidence that has been given by some people,” said Grimsley, who prior to Aberdeen Standard Investments co-founded the UK’s first regulated crypto hedge fund.
“It is only a fraction of the market that will be interested in this. It’s still a very small, limited section of institutional investors investing at this point,” he said.
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