Crypto Assets Are The ‘Poorest Hedge,’ BTC Remains an Investment Vehicle: JPMorgan

The bank strategists see crypto investing best to protect against the loss of faith in a country's fiat currency or payment system.


The cross-asset strategists of JPMorgan Chase say while Bitcoin is the hottest way to diversify portfolios, it has a big valuation risk.

Bitcoin is the “least reliable hedge during periods of acute market stress,” wrote strategists John Normand and Federico Manicardi in a report called “What cryptocurrencies have and haven't done for multi-asset portfolios” on Thursday.

According to the strategists, Bitcoin has been bad at offsetting short-term drawdowns in big sell-offs. The digital asset’s popularity among retail investors is further increasing its link with cyclical assets. They wrote,

“The mainstreaming of crypto ownership is raising correlations with cyclical assets, potentially converting them from insurance to leverage.”

While Normand and Manicardi said small (up to 2%) allocations to cryptocurrencies improve portfolio efficiency due to high returns and moderate correlations,

“Over shorter infra-month and intra-quarter horizons, crypto-assets continue to rank as the poorest hedge for major drawdowns in Global Equities, particularly relative to the fiat currencies like the dollar which they seek to displace. To the extent that Bitcoin remains an investment vehicle rather than a funding Currency.”

Cryptos’ Role in Portfolio Diversification

The strategists acknowledge the appeal of Bitcoin for investors who are worried about policy shocks and suggest crypto investing might be best to protect against the loss of faith in a country's fiat currency and its payments system.

However, while trying to find cryptocurrencies' role in portfolio diversification, the team warned that it wouldn’t be behaving like a traditional defensive asset in the near future.

Normand’s colleague at JPMorgan, Nikolaos Panigirtzoglou, suggested in early January that the price of Bitcoin could hit $146,000 in the long run as it draws investors from gold.

Around the same time, Bitcoin hit an ATH of $42,000 and is currently in a “healthy consolidation” around $30,000.

“Whether cryptocurrencies are judged eventually as a financial innovation or a speculative bubble, Bitcoin has already achieved the fastest-ever price appreciation of any must-have asset,” in comparison to the performance of gold in the 1970s, Japanese equities in the 1980s, tech stocks in the 1990s, Chinese equities in 2000s, and FANG stocks in 2010s, they wrote.

But while Bitcoin had a low correlation with the traditional hedges like gold and treasuries, it recently started moving more with traditional cyclical markets and strategies said, “If sustained, this development could erode diversification value over time.”

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