The traditional 60/40 portfolio (balancing equities and fixed-income assets) hasn’t been battle-tested for these unprecedented times. Central bank balance sheets are soaring, and interest rates are at record lows. This means investors are reaching far and wide for yield – oftentimes without a reliable hedge.
Advisers should consider talking to their clients about diversification, particularly in bitcoin. The cryptocurrency offers high returns that are uncorrelated with traditional asset classes. This diversification benefit means that bitcoin could be a key hedge against downside risk.
Damanick Dantes, CMT is a macro trader specializing in commodities, equities and crypto. He previously worked on the global asset allocation research team at Fidelity Investments. CoinDesk will host the Bitcoin for Advisors conference on Nov. 9-10 to explore the benefits of digital assets.
We saw this in October, when the VIX (a measure of volatility expectations) shot up 50% and bitcoin held strong, rising almost 25%. How’s that for a modern-day safe haven?
Companies are also using bitcoin to hedge risk. In September, MicroStrategy announced that it will purchase $175 million worth of bitcoin. The Nasdaq-traded company plans to invest up to $250 million over the next 12 months in a mix of assets such as stocks, bonds and bitcoin.
Investors could take a page out of MicroStrategy’s playbook. Even a small allocation to bitcoin could help offset the impact of rising inflation, which will erode the purchasing power of cash – currently yielding close to nothing.
There’s a good chance clients will put more of their cash to work in bitcoin – and they’ll seek help from their advisers: 76% of financial advisers surveyed by Bitwise Asset Management received questions from clients on crypto in 2019. It’s time to treat bitcoin as an asset class.
Here are four charts that illustrate bitcoin’s advantage for investment clients.
1. Bitcoin has risen in tandem with the volume of negative-yielding debt. This means investors of negative-yielding debt lose money when the bond matures. Rising fear has pushed more investors into bonds, causing yields to reach negative territory in some countries. But despite all of this uncertainty, bitcoin has maintained its luster.
2. Bitcoin has a weak correlation with traditional asset classes. Simply put, bitcoin could provide a useful hedge if stocks fall. It can even work as a hedge against commodity and currency risk.
3. Investors are highly compensated for the risk involved in holding bitcoin. The Sharpe ratio is a measure of risk-adjusted returns. So, despite higher volatility, bitcoin was still able to outperform traditional asset classes in recent years.
4. Bitcoin is becoming more popular in developing countries. Consumers across the world are using bitcoin for payment transactions and remittances. This is great for long-term investors holding bitcoin as both an international store of value and medium of exchange.