Investors who are interested in diversifying a portfolio with alternative assets may consider the expansion of the cryptocurrency universe and the outlook for crypto and blockchain technology in 2020.
In the recent webcast, Bitcoin In 2020: What Financial Advisors Need To Know, Matt Hougan, Global Head of Research, Bitwise Asset Management, pointed out that while cryptocurrencies, like bitcoin, may exhibit extremely volatile fluctuations compared to traditional assets, investors have been heavily rewarded over time. Specifically, bitcoin traders suffered through a 72% price decline in 2018 but enjoyed a 92% return in 2019, compared to the 31% gain in the S&P 500, 22% for MSCI EAFE, 18% for MSCI EM and 18% gold. Over the past three years, bitcoin registered a whopping 650% return, compared to the S&P 500’s 52%. For the past five years, bitcoin surged 2,208%, compared to the S&P 500’s 71% advance.
This alternative source of return may be especially important ahead as we witness slowing growth in traditional stocks and bonds. Morgan Stanley projects traditional 60/40 stock/bond portfolios will post gains of about 2.8% per year for the next 10 years, which would mark the lowest 10-year return for such a portfolio in almost a century.
Furthermore, the cryptocurrency returns exhibit low correlations to equities and fixed-income markets. Specifically, bitcoin has a -0.06 correlation to the S&P 500 and a -0.01 correlation to the U.S. Aggregate Bond Index while ethereum has a -0.04 correlation to the S&P 500 and a +0.05 correlation to the Agg.
Bitcoin is also experiencing greater regulatory approval and is going mainstream. The CME bitcoin futures market is now the largest single bitcoin market in the US. The regulated market shows average daily trading volume increased 75% in 2019 over 2018. There is now 40 million blockchain wallet users and 6% of Americans currently own bitcoin – the number coinbase accounts that trade cryptocurrencies is now 2.5 times the amount of accounts on Schwab’s brokerage platform. Bitcoin exhibits processes more transaction volume than PayPal at $1.3 trillion.
In the recent Bitwise and ETF Trends 2020 Benchmark Survey of Financial Advisor Attitudes Toward Crytoassets, 10% of independent RIAs indicated that they owned crypto in their personal portfolio, followed by 3% of financial planners, 2% of broker dealers and 2% of wirehouse representatives. About 34% of individual clients also said they invest in crypto on their own. Looking ahead, around 42% of financial professionals said they plan to increase allocations to crypto.
Financial professionals highlighted the benefits of adding cryptoassets to a portfolio, including low or uncorrelated returns with other assets and high potential returns. However, they also showed some apprehension to digital currency due to regulatory concerns, volatility, how to value cryptocurrencies, lack of accessibility, lack of understanding and custody concerns, among others.
Hougan pointed out that bitcoin is being utilized as a geopolitical hedge or alternative asset to traditional stocks and bonds, especially during periods of heightened volatility. In August 2019, bitcoin prices and trading activity spiked in response to rising tensions in the US-China trade relationship as many turned to bitcoin as a type of new safe-haven asset. This new role was further solidified when bitcoin’s price surged in response the U.S. airstrike that killed Iranian Major General Qasem Soleimani.
“This is a significant narrative that we believe will meaningfully drive bitcoin’s adoption by investors in 2020 and beyond,” Hougan said.
Furthermore, Hougan underscored the improving fundamentals, notably on the supply side. In May 2020, the amount of new bitcoin issued each day will drop by 50%. This “halving” phenomenon in the cryptocurrency market occurs once every four years, and it has historically preceded significant bull markets.
“The effects of supply reductions on crypto prices aren’t immediate; it takes time for the impact to build,” Hougan said. “Nonetheless, removing a significant portion of new supply reduces persistent selling pressure, and can have a meaningful impact over time.”
On the demand side, Hougan argued that Facebook’s push to open up crypto to billions of its users could further support the case for digital currencies.
As a way gain exposure to this up-and-coming market, Bitwise Asset Management created the world’s first cryptocurrency index fund and offers two low-cost, liquid beta funds, holding bitcoin and ethereum exclusively.
The Bitwise Bitcoin Fund and the Bitwise Ethereum Fund are the second and third strategies in the Bitwise fund family, joining the broad-market Bitwise 10 Private Index Fund. The funds is driven by inbound client interest and investor dissatisfaction with existing options, many of which carry premiums, charge exit fees, have lockups, and/or charge expenses to the fund outside the stated management fee.
The Bitwise Bitcoin Fund holds bitcoin and captures the total returns available to investors in the world’s largest cryptoasset, including any meaningful hard forks and air drops. The Bitwise Ethereum Fund does the same for ether. Funds safeguard holdings in 100% cold storage with an institutional third-party custodian, and prepare simple K-1 tax documents for investors each year.
Financial advisors who are interested in learning more about cryptocurrencies can watch the webcast here on demand.