Is there a future where bitcoin – or any other cryptocurrency – finds its way into a typical portfolio? Yes. But much remains in the air before widespread institutional acceptance
In 2013, a friend gave Elon Musk a slice of Bitcoin cake. ‘Clearly … I should have at least bought some bitcoin eight years ago — talk about being late to the party,’ he said in February. Just days later, his company Tesla announced that it had bought $1.5 billion of the cryptocurrency for ‘more flexibility to further diversify and maximize returns on our cash’.
The move capped off an extraordinary year for cryptocurrency, one which has seen it move out of the fringes of finance and firmly into the mainstream. JP Morgan, whose CEO Jamie Dimon called bitcoin a ‘fraud’ in 2017, set a long-term price target of more than $146,000 in January.
But that was four years – and at a ten times smaller price – ago. Arguably the greater career risk to wealth managers now is missing out on the party.
In November 2020 wealth manager Ruffer – which describes its approach as ‘putting safety first’ – is thought to have become the first mainstream City firm to buy a significant amount of bitcoin. Describing the move as ‘primarily defensive’, the wealth manager cited its ‘favourable asymmetry’ to other parts of a portfolio and anticipated a ‘wave’ of institutional acceptance in a note to clients.
‘Gaining exposure to bitcoin is an evolutionary rather than a revolutionary move,’ it explained. In January, the firm sold 40 per cent of its exposure for a reported $750m.
It could prove to be a watershed moment for the industry, where HNW interest has long been latent. Last May, PwC estimated that there were around 150 active crypto hedge funds holding a total of $2bn under management. Some 48 per cent of investors in such funds were family offices and a further 42 per cent were HNWs.
Luc Filip, investment director at Swiss wealth manager Syz, acknowledges that there is a ‘trend component’ behind the current momentum but errs on the side of caution. ‘We don’t currently own any cryptos, but we are developing the fact that we want to be able to trade them directly,’ he tells Spear’s.
Filip has ‘no doubt’ about a long-term future that involves blockchain, the decentralised trading technology that cryptocurrencies are built on.
But getting a short-term picture is more complex. The volatility of crypto makes it difficult to value on a ‘fundamental basis’ and getting a precise target price can be a ‘real challenge’ as a result. A familiar comparison to gold, another limited supply asset, ‘could make some sense’ within a low interest rate environment, Filip says, but ‘it’s important to remember that cryptocurrencies are rather new, especially for private clients’.
This is especially important when considering the looming matter of regulation, an area where there is currently ‘no consensus’. The anonymity of cryptocurrency ownership has made it attractive to criminals – a regulatory issue that remains a key hurdle to long-term portfolio adoption.
Is there a future where crypto finds it way into a typical portfolio? ‘Under certain forms, yes,’ Filip says. Whether that form is bitcoin, dogecoin, or any other cryptocurrency is unclear. Investors had their cake with crypto in 2020. How much longer they can carry on eating it is an open question.