JPMorgan Chase & Co cross-asset strategists have bad news for anyone on Wall Street betting that Bitcoin is the hottest way to diversify portfolios in a world short on hedges but big on valuation risk.
Not only has Bitcoin proved lousy at offsetting short-term drawdowns in big sell-offs, its very popularity among retail investors is increasing the token’s link with cyclical assets, their research suggests.
The upshot? Crypto investing might be best seen as way to protect against the loss of faith in a country’s currency or payment system – rather than a competitor to the likes of gold.
Bitcoin is the “least reliable hedge during periods of acute market stress”, wrote strategists John Normand and Federico Manicardi in a report recently.
While they acknowledged the appeal of Bitcoin as an answer for investors who are worried about policy shocks, the team cautioned that it won’t behave like a traditional defensive asset anytime soon.
“The mainstreaming of crypto ownership is raising correlations with cyclical assets, potentially converting them from insurance to leverage,” they added.
It looks like Wall Street is running Bitcoin, at least for now.
The trajectory of Bitcoin so far has been unlike anything that Wall Street has seen, and the debate is heating up among professional investors. In early January, Mr Normand’s colleague at JPMorgan, Nikolaos Panigirtzoglou suggested that Bitcoin could hit US$146,000 in the long run as it draws cash from investors who would have previously bought gold.
Mr Normand and Mr Manicardi analysed Bitcoin’s relationship with other assets to try to answer the question: Can investors use it to diversify a portfolio?
In the past five years, Bitcoin had a low correlation with hedges, such as gold and Treasuries and the yen, making it potentially useful for investors managing a broad portfolio. But in the recent run-up, the dynamics have changed and Bitcoin is moving more in lockstep with traditional cyclical markets.
“If sustained, this development could erode diversification value over time,” they said.
Still, opinions remain sharply divided over whether cryptocurrencies are a new asset for the digital age or speculative frenzy gone haywire. After surging and crashing in 2017, the market was largely dormant until last year, when a combination of renewed Wall Street interest and Robinhood speculation sent prices skyrocketing once again.
Bitcoin prices have gradually pulled back after surpassing US$40,000 in early January and were trading around US$31,000 on Friday.
“Whether cryptocurrencies are judged eventually as a financial innovation or a speculative bubble, Bitcoin has already achieved the fastest-ever price appreciation of any must-have asset,” Mr Normand and Mr Manicardi wrote. BLOOMBERG