How the Thesis of Investing in Cryptocurrencies Changed

However, in the first half of the year, digital currency has been increasingly correlated with stocks and other risky assets. Despite a slight rally in recent days, bitcoin was down 36% year-to-date when the market closed on May 17. Tech stocks such as Amazon, Netflix and Meta Platforms (formerly Facebook) are down around 32%, 68% and 40%, respectively, since the start of the year.

On May 12, bitcoin even dipped below US$26,000 for the first time since December 2020. Over US$200 billion was wiped from the market that day.

Alex Tapscott, managing director of the digital assets group at Ninepoint Partners, which manages the Ninepoint Bitcoin ETF, observed a growing correlation between bitcoin and tech stocks over the year.

“That tells me two things: one, it’s an asset class that’s more widely held. It is held by many institutions, it is quoted in the mainstream media. It therefore begins to trade like a more conventional financial asset, he analyzes. But it’s also a little disappointing, because one of bitcoin’s great attributes, historically, is that it’s uncorrelated, which can improve measures of risk-adjusted returns when added to a portfolio. »

Alex Tapscott, however, believes that bitcoin will regain this role as an uncorrelated asset in the medium to long term. “But it is clear that in times of financial stress, in all markets, it starts to converge towards the performance of other types of assets. »

Greg Taylor, chief investment officer at Purpose Investments, believes that a certain type of investors could be contributing to bitcoin’s turmoil.

“It feels like a lot of investors who have taken riskier positions – whether in technology, startups or private assets – also hold bitcoins. So those parts of the portfolio are affected,” summarizes Greg Taylor, whose company manages various Bitcoin and Ether FNDs.

“It could also be that they are just selling anything to meet margin requirements or to pay bills.”

According to April data on Canadian ETF flows from National Bank, crypto-asset ETFs had the “worst monthly outflow” since their inception in February 2021, with C$338 million in outflows.

Despite bitcoin’s dramatic fall on May 12, Greg Taylor says there has been no significant outflow for Purpose’s cryptocurrency funds. In fact, he even reports that the company had its “biggest day of inflows” for its USD Bitcoin ETF the week of May 8.

“Given the space and the volatility that we are experiencing, there was probably a bit of “ buy the dip“. People have been targeting bitcoin to go back to $30,000. So when it got to that level, that’s when we saw buying happen,” he comments.

Amy Arnott, portfolio strategist at Morningstar, wrote an article in April about whether cryptocurrency really helps diversify a portfolio.

Amy Arnott referred to Morningstar’s 2022 Diversification Landscape Report, in which the firm looked at how different asset classes have fared and how the correlations between them have evolved over the past two years.

“We found that while cryptocurrencies have an unusually low correlation with traditional asset classes, their volatility makes them difficult to use in a diversified portfolio,” she writes.

Amy Arnott was citing the performance of the CMBI Bitcoin Index in 2021, noting how it rose 104% in the first quarter, before plunging 40% in the second quarter, then gaining 25.3% in the third quarter before falling. fall into the red in the fourth quarter, as high-risk assets were sold in December.

“These dramatic performance swings continued into early 2022,” she adds.

“Diversification value is a potential reason to add cryptocurrencies to a portfolio, but investors should also consider other factors, such as their ability to hold on through periodic cryptocurrency declines, which have been unusually rapid and severe. »

Despite recent cryptocurrency volatility, Alex Tapscott says bitcoin is a good long-term diversifier and “demonstrates an ability to improve risk-adjusted returns. And points out that the build-up to recent months has been staggering, if volatile.

Alex Tapscott cites data released last year by Charlie Bilello, founder and CEO of Compound Capital Advisors, which shows that from 2011 to 2021, bitcoin was the best performing asset class over the 10-year period, with a 230% annualized return.

At the time of the study, bitcoin was trading above US$60,000, near its peak, and much of its gains were made during the pandemic, when tech stocks also soared. At the start of 2020, bitcoin was trading at around $7,300.

“We are still convinced that cryptocurrency is something that will stay with us for a long time. It’s not a flash in the pan – utility will come out of it,” says Greg Taylor.

He thus compares cryptocurrency to the Internet bubble of the late 1990s.

“A lot of businesses have been born, and a lot have failed. But, at the end of the day, you will always have the Amazons, the Facebooks and the Googles that came out of it,” he exemplifies. The winners of the cryptocurrency market have yet to be “sorted out”, he says, however.

Both Alex Tapscott and Greg Taylor have recognized the volatility of cryptocurrency, which is why they recommend an allocation of 5% or less to this sector for the average investor.

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