American bank JP Morgan outlined three key reasons for including bitcoins in investment portfolios. According to analysts, the asset will increase the efficiency of any portfolio.
The report “What Cryptocurrencies Have and Haven’s Done for Multi-Asset Portfolios,” published by John Normand, Head of Cross-Asset Strategy at JPMorgan, explores the use of cryptocurrencies to diversify portfolios.
The opening chapter acknowledges that “Bitcoin has already achieved the fastest-ever price appreciation of any must-have asset to which it is often compared,” such as gold in the 1970s, Japanese stocks in the 1980s, US technology stocks in the 1990s, Chinese stocks in the 2000s, commodities in the 2000s, and FANG stocks in the 2010s. The analyst admitted that bitcoin is very volatile, but gave three reasons why investors should consider including bitcoin in their investment portfolios for hedging purposes.
First, “Equity and credit valuations look record-rich for a very young business cycle,” the report reads. Second, “conventional hedges like DM bonds barely serve as insurance when US 10Y rates are near 1%.” The report clarifies that the drop in yields on bonds to negative levels in Japan and Europe and to 1% in the US forced investors to focus on alternative investments.
The third reason concerns “some as-yet unseen shocks (materially higher inflation, economically-debilitating cyber attacks or climate catastrophes),” that, according to a JPMorgan analyst, “could favor an asset that operates outside conventional financial channels.” For example, Normand cites the emergency monetary and fiscal stimulus over the past year, which raises general concerns about the portfolio’s vulnerability to macroeconomic or political shocks.
The analyst noted that for the long-term efficiency of the portfolio, “(up to 2%) allocations to cryptocurrencies still improve portfolio efficiency due to high returns and moderate correlations.”
However, Normand did not recommend using cryptocurrencies for hedging in the short term. “Over shorter intra-month and intra-quarter horizons, crypto assets continue to rank as the poorest hedge for major drawdowns in global equities, particularly relative to the fiat currencies like the dollar which they seek to displace.”