Digital Assets — framing the true investment opportunity
Disclaimer: this blog post was put together for informational purposes only based on my review and analysis.This should not be construed as a solicitation, offer, or recommendation to acquire or dispose of any investment, engage in any transaction.
By Asim Ahmad, CFA — Head of Portfolio Management at Eterna Capital
Key Takeaways
- Digital Assets should be considered a longer-term investment opportunity with many reasons to be optimistic
- At this stage, the opportunity should be measured qualitatively rather than quantitatively
- This is true diversification away from the traditional financial systems but correlations and market drivers will continue to evolve over time
The Polarised Views of the Market
Whilst most would agree that blockchain technology has merit and multiple applications, the jury is still out on the role of Digital Assets. The articles in the media generally fall into two camps.
1) Those who believe that blockchain technology is going to change the whole world. Beyond the financial industry applications that most potential investors are aware of, it is believed Digital Assets can impact social order, the balance of power, wealth, opportunity as well as things like censorship, transparency and many more of the ways we interact with each other.
2) Those who believe there is no such revolution on the horizon and that the financial system will continue to function as it always has. The role of Digital Assets is limited in society. Social order will not be changed but blockchain may have applications within some industries to increase efficiencies.
Framing the Opportunity
Okay, let’s now pull out some historical data points, put together a correlation matrix against traditional assets and maybe we can run some analysis to show how your total portfolio will be impacted with an allocation to Digital Assets. This is all valuable analysis I used to love looking at and showing clients in my previous roles, but most of those asset classes have existed for decades… Regulation and infrastructure are already in place. Market cycles and typical volatility ranges are well understood, as well as the sensitivity of each asset class to market drivers such as interest rates, inflation, etc.
I have seen a lot of this type of analysis used for Digital Assets. The truth is that we can put together analysis to prove that camp 1 above is correct or camp 2 is correct based on the time period and performance metrics we choose to consider. The key point for an investor is that we aren’t really gaining any meaningful insight from this as the market is in its early stages and is dynamically evolving.
Framing the Opportunity (second attempt)
There are a few things we can learn from history.
Lesson 1: Massive returns, Bitcoin generated returns of 1,369% over 2017 [1]
Lesson 2: Massive losses, Bitcoin suffered losses of 74% over 2018 [2]
Now this can be confusing for investors who are considering entering the market. Predicting what will happen in the next year is very risky! For an investor with a diversified portfolio and sufficient funding to meet their personal investment objectives, the case for investing in Digital Assets with a short-term investment horizon is unclear.
Investors that are able to take a longer-term view are better placed to benefit from the opportunity. The progress made each year is astonishing and there is much to be optimistic about, the details of which go beyond this blog post but a high-level overview is as follows:
- Regulation is coming. It might be slow but every year the framework is developing and this is a good sign for a longer-term investor. It’s clear that governments don’t wish to stop innovation and fall behind
- Education and awareness of the asset class is increasing. From an investors’ lens, we have gone from something nerds and criminals play around with on the internet into something that the largest of financial institutions are participating in. For investors, the opportunity is becoming very difficult to ignore
- The infrastructure for mainstream adoption/investment is being built — with many of the largest financial institutions involved
- True diversification, for most investors this will be their only investment outside of the traditional financial markets
- Appreciating and adapting to the evolution of society towards the values that are important to millennials and how this will shift macro trends
Many investors regretted missing the opportunity of investing at the price levels of 2017, with many having no knowledge of the asset class at the time. Those prices are now being revisited with Bitcoin back at the price levels of August 2017 (c.$4,000). However, this time the asset class has more than a year of extra progress in terms of infrastructure, development and regulatory framework. The case for investing in Digital Assets continues to look compelling.
Author
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References
[1,2] Source: coinmarketcap.com
