In a recent market note, MLC chief investment officer Dan Farmer said that, like many industry counterparts, the firm remains in the “not now” as opposed to the “not ever” camp when it comes to bitcoin.
“Wind the clock back a few years and if you had asked investment professionals for their opinions on cryptocurrencies, you would likely have received a withering response. However, the passage of time has fostered some change, and outright rejection has given way to more nuanced thinking,” Farmer said.
The CIO pointed out that Trump 2.0 has inspired growing calls for acceptance. Yet, the President’s own foray into cryptocurrencies, via the launch of his $TRUMP meme coin, has divided cryptocurrency supporters.
More importantly for the market, however, was President Trump’s executive order establishing a working group tasked with, among other things, evaluating the potential for a “national digital asset stockpile”, alongside proposing a regulatory framework for the issuance and operation of cryptocurrencies.
Alongside other institutional investors, Farmer agreed that cryptocurrency exchange-traded funds (ETF) are also playing an important role towards legitimisation of the asset class.
“Upon its emergence as the first decentralised cryptocurrency in 2009, knowledge of bitcoin was largely confined to techno-libertarians who viewed it as a way of breaking free of central banks and governments who, in their telling, debase fiat currencies with ‘money printing’ to finance unsustainable borrowing and spending, imperilling economic wellbeing,” Farmer said.
“The growing weight of retail investor interest proved to be telling,” he added, noting that it was more than a year ago that the US Securities and Exchange Commission approved spot bitcoin ETFs, arguably bitcoin’s “first significant legitimisation”.
Now, the likes of BlackRock, JPMorgan Chase and Goldman Sachs are participating in the digital asset space.
“Such companies’ embrace of bitcoin contributes to shifting the perception of cryptocurrency from a speculative asset to [a] more mainstream financial instrument,” he said.
However, Farmer said that “blindly following others” should not justify adding bitcoin to one’s own investment portfolios. Instead, the CIO affirmed that MLC will come to its own conclusions via research and analysis.
MLC joins a number of institutional investors who have made their thoughts on cryptocurrencies known. Earlier this month, UniSuper CIO John Pearce described the recent rally in cryptocurrencies as a “sign of irrational exuberance” and firmly stated that the savings of UniSuper’s 647,000 members will “not be going anywhere near” such investments.
Meanwhile, the country’s largest fund, AustralianSuper, has also opted for a more measured stance. Although it has no plans to directly invest in cryptocurrencies, it is exploring blockchain technology as a potential growth area.
But AMP, which made its first foray into bitcoin last year, acknowledged that cryptocurrency had grown “too big” and its potential “too great” to ignore any longer.
For and against
Expounding on the potential case for bitcoin, Farmer highlighted the cryptocurrency’s “remarkable” compound annual growth rate compared with gold and US equities, at 142 per cent over the last year.
“It can be easy to be drawn in by such past performance and so a word of warning is in order; a report noted that bitcoin has ‘outperformed all major asset classes in seven out of the last 10 years’, while simultaneously also ’being the worst performer in three of these 10 years’,” Farmer added.
“Moreover, the future is rarely a straight line extension of the recent past and so it is possible that bitcoin’s days of exceptional, albeit very volatile performance, may be in the rear view mirror.”
Investors may also be drawn to bitcoin because its supply is not a function of demand, with around 19 million bitcoin currently in circulation.
Farmer continued: “Even as available supply shrinks as it nears the 21 million ceiling, there is no possibility of debasement as there is no centralised intermediary, like central banks, able to influence bitcoin supply.
“Bitcoin’s finite nature and in-built scarcity would seem to buttress its claims as a store of value, a kind of digitised gold that, like the precious metal, can play a role as a protector against inflation.”
Turning to arguments against the cryptocurrency, the CIO said that extreme performance swings count against bitcoin, with drawdowns of more than 50 per cent being a “regular feature” of its performance over the last decade.
Bitcoin has also been nearly four times more volatile than US sharemarkets, analysis has shown.
“Everyone loves upside volatility, but how about the performance craters associated with bitcoin?” Farmer added.
Moreover, as cryptocurrency participation has broadened, bitcoin’s correlation with shares have trended up during times of capital market turbulence, undermining the argument that cryptocurrency represents a source of portfolio diversification.
At the same time, bitcoin meaningfully outperformed in months where US shares delivered top quartile performance.
“On balance, we continue to lean towards the ‘not now’ to bitcoin camp when considering if bitcoin warrants a place in our diversified portfolios. We continue to keep a close eye and an open mind, and actively monitor the cryptocurrency ecosystem including regulators’ attitudes,” Farmer said.
