Over the last month or so, we have been gauging our clients’ views on whether cryptocurrencies could become eligible holdings in their portfolios in the near to medium term. This follows recent news that BlackRock has added bitcoin futures as a potential investment for two of its US funds as well as BNY Mellon’s announcement that it would begin offering cryptocurrency custody services, the first large global custodian to do so.
While there was a very small number of clients that were somewhat positive about the idea, the vast majority of our clients were either uncertain or very negative about bitcoin ever becoming a mainstream holding in their portfolios. The most common reason given was unease about the fact that bitcoin lacks any form of asset backing, unlike gold which is a real asset or traditional currencies which are effectively guaranteed by their respective governments. As one client put it – “the value of bitcoin is completely notional and depends solely on the market participants continuing to believe that it has a value”. Several also cited concerns about the fact that the vast majority of bitcoins are held by a very small number of holders which limits its liquidity and makes it much more susceptible to significant price swings. It was for this reason also (i.e. the significant level of volatility) that some clients dismissed its potential as an alternative inflation hedge to gold within a portfolio.
We were particularly intrigued by one client’s comments who noted that while he didn’t believe cryptocurrency was an investable asset, investors could ultimately end up making the decision for him. He noted that “if investors en masse start selecting investment products such as Blackrock’s because those products invest in crypto assets, then funds that refuse to invest will quickly see their investors walking out the door”.
It can’t be easy being an active fund manager if your investors start making the investment decisions for you.