Portfolio Perspective – Spotlight on digital assets

Background

This spring we shared our initial comments around bitcoin, questioning its potential role in a well-diversified portfolio. We concluded:

• Bitcoin could not be neatly categorized as a commodity, security or asset class.
• Bitcoin is a speculative asset lacking reliable relationships with the economic drivers informing our investment process.
• During volatile market risk regimes, bitcoin has performed as a “risk-on” asset increasing portfolio risk instead of providing portfolio ballast as a diversifier.
• Bitcoin was subject to elevated uncertainty risk due to the lack of a clear regulatory framework.
• Investors should not invest money in cryptocurrencies they could not afford to lose.

What happened

Our team continues to closely monitor the opportunities and risks in the digital asset space. We’ve observed:

• China’s ban on Bitcoin mining in June (the process of validating bitcoin transactions) disrupted the network and contributed to a ~50% summer correction in bitcoin.  
• The cryptocurrency universe is currently valued at over $2.7 trillion but bitcoin’s dominance has declined from ~72% in January to ~43% today due to the emergence of other blockchain protocols, such as Ethereum, that facilitate simpler creation and faster processing of digital assets than the Bitcoin network.
• Regulators have initiated collaborative oversight efforts as evidenced by the President’s Working Group Report on Stablecoins released on November 1, but have stopped short of delivering a framework. 
• Futures-based bitcoin ETFs have now launched without any material objections by the SEC. However, these funds do not invest directly in bitcoin, but instead use futures and other derivative contracts, a structure we do not find practical, given – among other things – the additional risks introduced.

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