Previously, I wrote about how investors may consider adopting more well-defined portfolios when it comes to the diversification of asset classes.
In line with this, Morgan Stanley had published a recent special report titled “The Case for Cryptocurrency As an Investable Asset Class in a Diversified Portfolio.”
It provides an objective view and a good balance between identifying the opportunities in cryptocurrencies as well as the risks involved in them.
It also gives us an idea of why the institutional players are getting into the cryptocurrency game, and most importantly why cryptocurrency is no longer just a ‘fad’. (although some meme coins may always hold that status)
What the big boys say
Unlike most asset classes, the world of cryptocurrency has an additional layer of complexity behind it known as the “blockchain”. While the technicality of a blockchain can be complicated, at the very least, investors should know that a blockchain is a de-centralized database.
In summary a blockchain:
- requires ALL users operating within this database to approve any changes within it for the system to accept it,
- no single user has control over the database.
Morgan Stanley explains the relationship between cryptocurrencies and blockchain;
Most simply, cryptocurrencies are the “award metric” or economic incentive for work done to process and validate transactions on a distributed ledger network (or blockchain). Because every transaction is independently and publicly validated by each network node, error and fraud are reduced and processing costs are low because the need for disintermediation is eliminated.
The Case for Cryptocurrency As an Investable Asset Class in a Diversified Portfolio – Page 3
The publication of this report shows that Morgan Stanley (and by extension, the financial institutions) now recognises cryptocurrency as an asset class.
However, we should note that cryptocurrencies are still considered speculative assets:
Thus, in acknowledging cryptocurrency as a viable asset class, we nonetheless are suggesting that qualified investors approach it as speculative. As with any asset class still in its speculative phase, there are a multitude of risks—some predictable, some identified and some yet to be uncovered.
The Case for Cryptocurrency As an Investable Asset Class in a Diversified Portfolio – Page 3
Why did the big boys buy?
In the report, Morgan Stanley states that cryptocurrencies are now on a path to maturation driven by institutional adoption. The extract below provides a timeline as follows,
Hedging against inflation
While many factors drove the increased adoption of cryptocurrencies in the past year, the factor which I find the most logical is how cryptocurrencies were seen to be a hedge against inflation.
Not only has rampant, unprecedented and unconstrained global central bank money printing fueled the appreciation of most financial assets, but the backdrop of hugely negative real yields for both cash and debt (bond instruments) held in traditional fiat currencies has raised the specter of long-run debasement—implicitly, a structural punishment for savers and cash owners.
The Case for Cryptocurrency As an Investable Asset Class in a Diversified Portfolio – Page 4
Microstrategy is one of the companies that have famously snapped up Bitcoin as a hedge.
As we know, inflation is possibly one of the largest contributors to the recent tech correction which I’ve touched on previously in my article explaining the technicals behind the current NASDAQ correction.
With inflation, we now have investors seeking non-cash stores of value, which is a genuine rationale for the increased adoption of cryptocurrencies. Morgan Stanley elaborates more in the extract and diagram below:
Long-term investors, pension funds with long-dated liabilities and corporate treasurers naturally have begun to seek out new “stores of value,” and cryptocurrency has emerged as an option.
The Case for Cryptocurrency As an Investable Asset Class in a Diversified Portfolio – Page 4
The Crypto-millionaire…is it possible?
I’m going to be upfront about this.
I personally think that taking a $50 position into Shiba Inu (SHIB) gives me a better risk to reward ratio than buying the lottery. Just last week, I was able to buy about 6.5 million SHIB coins for $50. Needless to say, if SHIB ever got anywhere close to $0.2 or more, it would indeed be a very favorable trade.
So the question here remains, will it ever get there?
It’s anyone’s guess really.
Investors only have control over two factors
It is uncertain if SHIB will ever get to my price target, as one trader alone cannot influence the market. I can only control two things:
- my mindset when entering this trade, and
- the percentage of my portfolio in this trade.
These 2 concepts are essential for any investors or traders who are new to the world of cryptocurrencies and they are also concepts that Morgan Stanley have stressed in their study above:
The embrace of cryptocurrency as an asset class should not be misconstrued as a recommendation for any one coin. Like other new emergent technologies before it, first movers may not turn out to be the best or most long-lasting movers.
The Case for Cryptocurrency As an Investable Asset Class in a Diversified Portfolio – Page 9
The future: Acknowledgement ≠ Endorsement
When we look at the bull and bear argument of asset classes, we often take every single bit of input then twist the facts to fit the story in our heads
However, as investors, we should always try to remain as neutral and objective as possible. In this aspect, I want to emphasize that higher levels of institutional involvement in cryptocurrencies are in no way at all a GUARANTEE that such investments will pay off.
Unequivocally, our acknowledgement of crypto as an investable asset class and potential tool in the context of a diversified portfolio should not be taken as a blanket endorsement or as an assertion that the asset class has matured beyond its speculative phase.
The Case for Cryptocurrency As an Investable Asset Class in a Diversified Portfolio – Page 7
As with any form of investment, manage your risks!
P.S. Chris Long and AK are long term investors in cryptocurrencies. They have been in the game since 2016, and have continued to grow their portfolio even through the years of crypto ‘winter’. You can join them at their next live webinar to learn more about cryptocurrencies.
