JPMorgan Chase & Co. is the latest Wall Street firm floating the idea of investors using Bitcoin as a way to diversify their portfolios.
Strategists have recently touted cryptocurrency as a way to hedge against significant fluctuations in traditional asset classes such as stocks, bonds and commodities. Rather than making any big bets on Bitcoin, they’ve been recommending a relatively small allocation, which wouldn’t take too much of a hit even if the price goes down substantially.
“In a multi-asset portfolio, investors can likely add up to 1% of their allocation to cryptocurrencies in order to achieve any efficiency gain in the overall risk-adjusted returns of the portfolio,” strategists including Joyce Chang and Amy Ho wrote in a note on Feb 24.
See: Cryptocurrency: The next big thing or fool's gold?
Bitcoin has surged fivefold in the past year as prominent investors such as Paul Tudor Jones, Stan Druckenmiller and Elon Musk have piled in, with Tesla Inc. recently announcing a US$1.5 billion purchase of the asset. There were 106 million users of cryptocurrency in January, up from 92 million in the previous prior month, according to Crypto.com. BNY Mellon has announced plans to hold, transfer and issue the digital currency for its clients, while assets in the Grayscale Bitcoin Trust have more than doubled to US$33.5 billion since December.
Cryptocurrencies may be relatively new and volatile, but they’re also somewhat uncorrelated with other assets, and may be able to provide a good hedge. Former Federal Reserve economists Roberto Perli and Benson Durham at Cornerstone Macro LLC have run calculations and found that the volatility of equity portfolios can usually be reduced by adding some amount of digital assets.
“Through the insatiable buy-side pressure from exchange-traded fund issuers, close-ended funds and large public corporations adding Bitcoin to their positions, demand is massively outstripping supply,” said Annabelle Huang, partner at Amber Group.
If all corporations were to put 10% of their cash into Bitcoin, it would add US$200,000 to the token’s price, Ark Investment Management’s Cathie Wood said in a recent interview on CNBC.
JPMorgan said that digital coins have limits to their usefulness, however.
“Cryptocurrencies are investment vehicles and not funding currencies,” the strategists said. “So when looking to hedge a macro event with a currency, we recommend a hedge through funding currencies like the yen or US dollar instead.”
