A research fellow at the Federal Reserve Bank of St. Louise and a director at University of Basel have, a while back, published an article on the validity of Bitcoin and Crypto Assets in general. [1] Their conclusions should be of interest to everyone as they conclude that Crypto Assets look like a viable asset class.
Quote from the article
“As an asset, however, Bitcoin and alternative blockchain-based tokens should not be neglected. The innovation makes it possible to represent digital property without the need for a central authority. This can lead to the creation of a new asset class that can mature into a valuable portfolio diversification instrument.”
Store of Value
Crypto Assets is a new asset class which in my view should be a part of anyone’s investment portfolio. Today people are storing value in gold, collectible art, real estate, government bonds, cars and other collectibles. Gold was a useful store of value for the Silent Generation (1928–1945). As they were in their prime income years gold increased in price 15 times in a decade. The Baby Boomers (1946–1964) bought equities and experienced one of the biggest equity bull markets in the years of 1982–1999. The Millennials (1981–2000) are entering their prime-income years and are soon going to have over one trillion dollars’ worth of savings flow, just in the US. The likelihood of a few percentage points of that flow ending up in Crypto Assets should be high.
Traditional money is coming
Traditional money is building gateways into the crypto world because there is a lot of money to be made in this space. The biggest traditional financial security exchange, Intercontinental Exchange, owns exchanges for financial and commodity markets. The American company operates 23 regulated exchanges and marketplaces and made a net profit of $2,5bn in 2017. Circulating numbers in the crypto space are saying that Coinbase, a crypto currency exchange, that trades four currencies in total made over $600m in net profit over the same period. 3% of global crypto trading goes through Coinbase. In a year or two Coinbase could be making more money than the biggest exchange in America. Crypto Assets, with a total market cap of approximately $450bn, would be ranked among the top 20 equity markets in the world in terms of size. This is getting attention from traditional money.
Uncorrelated Alfa
Alfa is a financial term describing the active return one makes that exceeds the return of the market in general. If the alfa of an asset class in your portfolio is independent of the performance of the other asset classes, then this is called uncorrelated alfa. This is also the holy grail of asset allocation and portfolio strategy. If you can increase your expected return without increasing the portfolio volatility than this would obviously be interesting. With adding Crypto Assets to your portfolio this has been possible. Crypto Assets as an asset class has historically, even though the history is short, had very low correlation to most of the other asset classes and even negative correlation to gold. Looking at this through an asset allocation lens makes me positive on the outlook of Crypto Assets in general.
Disclaimer
This article should not to be viewed as legal advice, trading advice, financial advice, investment advice or personal advice.