Does bitcoin have a role as a ‘diversifier’ in a multi-asset portfolio?

We asked professional investors for their views on bitcoin. Here’s what they said.

Bitcoin is the best-known cryptocurrency and recently it has been making a lot more headlines for its dramatic price moves. With more investors taking notice and big brands such as PayPal (NASDAQ:PYPL) starting to embrace bitcoin, some professional investors are now considering whether it has a place in multi-asset funds.

One these investors is Ruffer. The asset manager has so far done very well for investors out of its positions in bitcoin. In a portfolio update for the Ruffer Multi-Strategies funds last year, the group explained its reasons for buying something as volatile as bitcoin for portfolios focused on capital preservation.

Interestingly, it says holding the cryptocurrency is a “defensive move” and one of several “unconventional sources of protection” it uses. “We see bitcoin as a small but potent insurance policy. It is a young and emerging asset, with a low correlation to other parts of the portfolio. Bitcoin diversifies the portfolio’s [much larger] investments in gold and inflation-linked bonds, and acts as a hedge to some of the monetary and market risks that we see,” the group said. 

In a recent video interview with interactive investor, Duncan MacInnes, co-manager of the Ruffer Investment Company (LSE:RICA), further outlined the investment case for having a small amount of exposure to bitcoin.

Mainstream adoption?

Ruffer thinks asset managers will soon embrace bitcoin as an alternative to gold and government bonds, arguing that “mainstream adoption by financial institutions could be around the corner”.  

But other investors are not so sure. Rathbones’ head of multi-asset investments David Coombs suggests that, to truly be part of the mainstream, bitcoin would have to be regulated. Not only would this be very difficult to do given that bitcoin uses blockchain technology, which means transactions are fragmented and hard to monitor, but it would go against the entire point of its existence as a decentralised alternative currency.

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‘It’s almost sci-fi’

“I’ve always felt with bitcoin that, the more mainstream it becomes, the more risky it becomes,” says Coombs. “I don’t think it can be mainstream, so therefore it can’t be a safe haven because the idiosyncratic risk is just far too high, and they are risks that I cannot in any way, shape or form predict.” With its value hard to forecast, and bitcoin impossible to legitimise without losing its raison d’être, the cryptocurrency is not an option for Coombs as a long-term investor.

“Bitcoin is almost sci-fi, that’s why it’s intriguing. But then you break it down to the sum of its parts and you’ve got this utopian store of value that governments can’t trace. And there’s your risk right there,” he says.

“I wouldn’t put my own money into bitcoin, let alone my investors’.”

‘An environmental disaster’

There several other reasons bitcoin is not appropriate to hold in a multi-asset portfolio, argues Chris Clothier, fund manager at CG Asset Management. His view is that bitcoin has no fundamental value, offers no income or margin of safety, is highly volatile and speculative, and is positively correlated to other risk assets.

“We are very reluctant to purchase any asset that has fallen in value, with reasonable frequency, by more than 80%,” he says, noting that, in its short life, bitcoin has experienced three falls of this scale or more.

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Another issue is that bitcoin is “nothing short of an environmental disaster”, having a carbon footprint equal to the entire population of New Zealand because of the energy consumption required to ‘mine’ (create) new bitcoins. There are also social issues surrounding it because of its use in criminal activities such as money laundering and drugs. As such, Clothier would be unable to hold bitcoin for ESG reasons alone.

‘Highly speculative’

The increasing acceptance and use of bitcoin over its short life is impressive, says Andrew Hardy, director of investment management at Momentum Global Investment Management. However, it still has a lot of shortcomings, not least its large and unpredictable falls in value. He remains open-minded on cryptocurrencies and wouldn’t say never to holding them in client portfolios, but a few things would need to change first for them to become investable for him. “I wouldn’t rule it out to invest in crypto at some point, but I don’t see it coming anytime soon,” he says.

“The reason we wouldn’t invest at this stage is I think it’s still highly speculative. You’re speculating on it being adopted much more widely as a means of payment and a store of value, and I don’t think most people who are buying at this stage are doing so for those reasons.”

Fundamental analysis

Hardy says that, if he is going to speculate, he would rather it be on something he can assess properly using fundamental analysis, such as a high-growth business. “There’s a world of opportunity out there, not least in stocks. Everyone is focused on the gains bitcoin has made over the past year or so, but there are plenty of stocks that have done the same sort of thing.” He points to Tesla (NASDAQ:TSLA) and some deep value stocks as examples that have performed as strongly over the same time frame.

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What would he have to see happening to convince him to invest in bitcoin? For Hardy, the answer is greater adoption, and bitcoin proving itself as a store of value and a genuine diversifier, rather than just a speculative asset. This will require a change in the technology and the way the world uses it, which will change how the market treats it and how it is valued, making bitcoin more stable, Hardy suggests.

Perhaps, if this does happen, we will see bitcoin and other crypto-assets beginning to find their way into more multi-asset funds in future.