Investor Alert

Jan. 22, 2021, 7:31 a.m. EST

How much of a role should cryptocurrencies play in a portfolio? Perhaps a surprising answer from a JPMorgan strategist

Watchlist Relevance

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

  • X
    Gold Continuous Contract (GC00)
  • X
    Bitcoin USD (BTCUSD)
  • X
    Ethereum USD (ETHUSD)

or Cancel Already have a watchlist? Log In

By Steve Goldstein

With cryptocurrencies such as bitcoin surging in value, a question confronting investors is what role should it play in a standard portfolio.

Many strategists would reply, zero, given the relatively short history of these assets and their still uncertain role going forward.

John Normand, head of cross-asset fundamental strategy for JPMorgan, has studied the issue, and, like many, he doesn’t see a big role for cryptocurrencies. But Normand didn’t discount its use altogether.

“Small (up to 2%) allocations to cryptocurrencies still improve portfolio efficiency due to high returns and moderate correlations, but the persistence of this diversification effect is questionable from both ends. Current prices are so far above production costs that mean-reversion lower in returns is a recurring concern. Also, the mainstreaming of crypto ownership is raising correlations with cyclical assets, potentially converting them from insurance to leverage,” said Normand.

He said cryptos don’t work as a hedge for stocks — particularly against fiat currencies like the dollar that enthusiasts hope to displace.

“To the extent that bitcoin remains an investment vehicle rather than a funding currency, it will always lack the short base that sponsors U.S. dollar (and Japanese yen and Swiss franc) strength during periods of acute market stress,” he said.

Even after a decade, cryptocurrencies are still about four times more volatile than equities or gold /zigman2/quotes/210034565/delayed GC00 +0.24% , he added. And the ratio of the bitcoin market price to its cost of production is over 3.

Furthermore, the mainstreaming of cryptocurrencies — notably with retail investors — is raising its correlation with all cyclical assets. “If sustained, this development could erode diversification value over time,” he said.

Over the last 12 months, bitcoin /zigman2/quotes/31322028/realtime BTCUSD -0.96% has surged 278% and ethereum /zigman2/quotes/108573964/realtime ETHUSD -1.42% has leapt 649%. The S&P 500 /zigman2/quotes/210599714/realtime SPX -0.48% has gained 16%, and the dollar index /zigman2/quotes/210598269/delayed DXY +0.88% has dropped 8%.

US : U.S.: Nymex
$ 1,733.00
+4.20 +0.24%
Volume: 351,549
Feb. 26, 2021 4:59p
US : CoinDesk
-449.95 -0.96%
Volume: 0.00
Feb. 27, 2021 5:27p
US : Kraken
-21.44 -1.42%
Volume: 129.93M
Feb. 27, 2021 5:27p
-18.19 -0.48%
Volume: 3.12B
Feb. 26, 2021 5:04p
US : U.S.: ICE Futures U.S.
+0.80 +0.88%
Volume: 0.00
Feb. 26, 2021 5:00p

This Story has 0 Comments
Be the first to comment
More News In

Story Conversation

Commenting FAQs »

Partner Center

Link to MarketWatch's Slice.