On January 10th, after more than a decade of denials, the Securities and Exchange Commission approved 11 applications for Bitcoin spot pricing.
The application first appeared before regulators in 2013, when the price of Bitcoin was $100. Meanwhile, Bitcoin prices have risen during the pandemic as retail adoption has skyrocketed and investors have increasingly sought to hedge against inflation.
Most recently, expectations for Spot Bitcoin approval have pushed Bitcoin closer to the highs seen during the coronavirus pandemic, with the digital asset currently sitting at $57,000.
Cryptocurrency supporters see the approval of the Spot Bitcoin ETF as a landmark moment for the digital asset, solidifying its status as a large-scale investment, with hopes that more institutional investors will follow suit. ing.
A month and a half later, this approval continues to raise new questions about Bitcoin's place in investors' portfolios and its fundamental value.
Is there a place for it in your portfolio?
As investors increasingly seek alternative, uncorrelated assets for diversification, cryptoassets can likely play a role in diversified multi-asset portfolios.
Bitcoin exposure can be used to generate alpha that is uncorrelated with traditional assets, said Alberto Garcia, head of asset allocation at ACCI Capital Investments, which invests in 21Shares Bitcoin ETP (ABTC). said.
“We use long and short options so that we can reduce the impact of investing in Bitcoin,” Garcia told ETF Stream.
“We never put a lot of weight in our portfolio because the risk profile is higher,” Garcia added.
Finally, from a portfolio construction perspective, “stress testing scenarios are useful when allocating Bitcoin to a portfolio,” as the risk profile needs to be measured to avoid a crash.
While some fund pickers see the asset as adding extra punch to their portfolios, other investors are seeing less of a benefit.
Sparrows Capital investment manager Mark Northway told ETF Stream that investors are investing in cryptocurrencies because prices are rising, not because digital assets are cheap. .
“Cryptocurrency is the ultimate embodiment of the idea that price doesn't matter,” Northway said.
“One of the questions I would say to investors who are buying Bitcoin is: What are your plans? Many are also long-term plays. Why should this price go up over the long term? If you ask them if they want to continue, no one can give them an answer.”
Is there a more obvious incident at hand?
The persistent skepticism and hesitance to allocate may be largely fueled by the view that Bitcoin, and cryptocurrencies more broadly, are not income-producing assets.
“Pure coins are problematic from an investment perspective,” Northway continued.
“These are the ultimate trading instruments in that the price is a function of buy and sell demand without the long-term use of the traded asset.
“That makes this a very risky investment proposition. Logically, for any asset price and value tend to converge over time, and in this case they only converge to zero.”
Janelle Jackson, Vanguard's global head of ETF capital markets and broker and index relations, expands on this view: “In stocks, you own shares in companies that produce goods and services, and many companies also pay dividends.
“With a bond, you pay a series of interest payments. A commodity…not gold…is a real asset that meets consumption needs, has inflation-hedging properties, and can play a role in certain portfolios.”
Since neither Bitcoin nor gold are income-producing assets, their values are derived using similar assumptions.
Thomas Schussler, Global Co-Head of Equities at DWS, explains: The same is true since gold does not generate income. Bitcoin falls into the same bucket for me.
“You can't value it based on its source of income, but you can compare it to other asset classes and evaluate it based on its history.”
Since gold and Bitcoin are touted by many as having similarities, comparing the two assets can help attribute gold's historical value characteristics to Bitcoin.
For example, both are hedges against inflation because they exist in fixed amounts, and they typically have relatively low correlations with stocks and bonds.
But most importantly, it acts as a store of value outside of traditional systems such as governments and central banks.
James Butterfill, head of research at CoinShares, said gold's “value-add is related to its perceived value as a store of value.”
“Bitcoin also fits into that category. I think the investment case is this new store of value,” he added.
Bitcoin's potential to replace gold as a store of value may make the investment rationale more stringent, but the length of time Bitcoin has been around is an important difference to consider. .
Schuessler said valuing Bitcoin is much more difficult than valuing gold, given that Bitcoin has only been around for 10 years compared to gold's history.
In addition to historical differences between Bitcoin and gold complicating their comparison as stores of value, Northway notes that gold's value is determined by the traditional financial system, while Bitcoin's value is the same. It added that it is not accepted by institutions, further complicating comparisons.
“After all, gold has value because central bankers around the world agree that it does.”
The last word
“Bitcoin will always succumb to this question of intrinsic value,” Butterfield said, adding that, more broadly, the debate about intrinsic value is “very subjective.” It pointed out.
As cryptocurrencies are a nascent asset class, fund selectors are still wondering whether Bitcoin has a place in a diversified portfolio. From a fund selector's perspective, Bitcoin is either a useful means of generating alpha or simply a wasted investment.
Northway concluded: “This is not a case to base a long-term investment on. This is a traded commodity and has no intrinsic value. Leave it alone as an investment allocation.”
This article first appeared in ETF Insider, ETF Stream's monthly ETF magazine for professional investors in Europe. To read the full version, go to click here.
