Barclays Private Bank has concluded that bitcoin is “virtually irrecoverable”, adding to doubt about whether the cryptocurrency is a viable asset class for pension funds and other heavyweight investors to consider holding in portfolios.
Many institutional investors sat on the sidelines when bitcoin experienced its first dramatic rally in 2017, but some claim to have been responsible for the latest sharp rise in valuation.
Bitcoin rose to an all-time high of $ 42,000 earlier this month before crashing to around $ 30,000. It is now trading at around $ 37,000.
“While it is impossible to predict the expected returns for bitcoin, its volatility makes the asset virtually ‘irrecoverable’ from a portfolio perspective,” said Gerald Moser, chief market strategist at Barclays Private Bank.
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“With spikes in volatility that are multiples of what is typically experienced by risk assets such as equities or oil, many would probably throw the cryptocurrency out of any portfolio in a typical mean variance optimization.”
Billionaire hedge fund manager Paul Tudor Jones is one of the big-name investors known to have allocated money to bitcoin, while SkyBridge Capital hedge fund founded by Anthony Scaramucci has filed with the US regulator to launch a bitcoin fund .
In a note on 12 January, Goldman Sachs said that the adoption of cryptocurrencies like bitcoin and altcoins like Ethereum would be “very gradual”.
But Moser said bitcoin is also a bad diversifier, and “seems to fail when diversification is most needed”, such as during a sharp downturn in financial markets.
According to Moser, weekly return correlations since 2016 show that bitcoin is not strongly correlated with any asset and has performed even worse than equities over the last three global equity corrections since 2015.
While investors would have benefited from some exposure to gold and fixed income assets during those corrections, Moser said bitcoin would have exacerbated losses.
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He added that fluctuations experienced alongside equities suggest that investing in bitcoin is “more like a bubble phenomenon rather than a rational, long-term investment decision”.
“The cryptocurrency’s performance has been driven primarily by retail investors joining a seemingly unsustainable rally rather than long-term institutional money investing,” said Moser.
The markets strategist is the latest voice to cast doubt on investors’ growing appetite for bitcoin.
Adam Grimsley, director of investment within the private markets team at Aberdeen Standard Investments, recently told Financial News that the idea of institutional investors raising the price of Bitcoin significantly was “a bit speculative”.
“This narrative of institutional investors is probably increasing exposure accurately, but I don’t think it’s close to some of the anecdotal evidence given by some people,” said Grimsley, a former founder of the Aberdeen Standard UK Investments first managed crypto hedge fund.
“Only a fraction of the market will be interested in this. It is still a small, very limited section of institutional investors investing at this point, ”he said.
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