To: Julius Wong who wrote (167020 ) 1/13/2021 4:03:39 AM From: TobagoJack Read Replies (1) | Respond to Re <<BTC >>(10) Will cryptocurrencies play a more important role in multi-asset portfolios? Possibly, but the adoption of cryptocurrencies is likely to be very gradual, at least from institutional multi-asset investors. With the strong performance of Bitcoin and altcoins like Ethereum into 2021 as well as announcements of large investments from hedge funds, multi-asset investors and corporates, there is unsurprisingly an increased focus on this space. Last week the market cap of global cryptocurrencies temporarily topped US$ 1 tn, with Bitcoin (US$ 656 bn) and Ethereum (US$ 123 bn) being by far the largest markets. With the large decline in the Dollar, deeply negative real yields and continued policy uncertainty, investors have been looking for alternatives to traditional cash holdings. Cryptocurrencies like Bitcoin and Ethereum are often compared to FX, as they can be used for transactions, or Gold as they have limited supply, which points to them being a store of value.Similar to Gold, Bitcoin doesn’t have a cash flow, an official issuer or backstop - as a result the perception of ‘value’ and demand can vary materially, for example due to changing regulations. Compared to Gold there are benefits on the ease of transaction and storage costs for cryptocurrencies. On the flipside liquidity and implementation for institutional investors can be difficult - custody and counterparty risks are also concerns. And Bitcoin has been very volatile (Exhibit 35) with both rapid surges and drawdowns, often alongside risky assets (Exhibit 36) - in December 2017 it climbed as high as US$19,000 before dropping to around US$7,000 in the following months. There has been a sharp drawdown again in the last few days, in part due to renewed concerns on regulation.The role of existing coins, like Bitcoin, in institutional multi-asset portfolios in the near-term is not clear. To add value from an asset allocation perspective an asset should either offer a better risk/reward or be uncorrelated. The risk/reward is difficult to assess but after being unstable for several years correlations have recently shown a more clear pattern: since last year Bitcoin has been positively correlated with the S&P 500 and Gold and negatively with the Dollar (Exhibit 37) - this points to a similar linkage to real yields like most assets have. Of course Bitcoin might be more leveraged to such cross-asset shifts and is possibly more convex - but institutional investors should be able replicate those exposures with leverage and options without liquidity and regulatory risks. Innovation in digital assets continues rapidly and will likely drive increased institutional participation over time. For example banks are exploring ways to use blockchain technology in their business, Facebook announcing plans for a Libra digital coin to be pegged to a basket of global currencies and central banks are investigating digital currencies - China’s PBOC has already launched a pilot program and the Fed warmed to the concept in 2020. As our economics team highlighted, there are benefits from central bank digital currencies (CBDG) in terms of payment system robustness, cross-border payments, and monetary policy transmission, but they could also create new risks like security/fraud and disintermediation of banks.
