Over the past 12 months the value of Bitcoin has fluctuated from around
$30,000 to a high of $68,000, and was just $9,545 as recently as January 2020. Despite this volatility, it is time to accept that digital assets are here to stay and, in fact, have a role to play in investment portfolios for their unique asymmetric risk return profile.
The first important step for those who are interested in better understanding this space is to stop using the umbrella term ’crypto currencies‘ but rather to think about the market as ‘digital assets’. In the same way that the broad term ’hedge funds’ is not particularly helpful in differentiating between the various and distinctly different investment strategies (long/short equity strategies vs macro versus CTAs), the term crypto currencies can be misleading for the newer investor in digital assets. It is important to differentiate between the various types of crypto or digital assets to understand the return potential.
When I think about this space, I separate Bitcoin from the rest of the universe as I believe it has distinct characteristics which set it apart. For example, it has finite supply capped at 21 million, algorithmically coded anti-inflationary characteristics with mining rewards halving approximately every four years, and it holds a special place emotionally as the first, oldest and most trusted digital asset.
Personally, I do not believe that the future adoption of BTC as a “currency” will be the primary driver of its appreciation, but rather its position for many new professional and institutional investors as the access asset to the digital assets ecosystem as well as its unique position as a digital store of value and effective inflation hedge. A comparison can be drawn between the perception of BTC versus the other digital assets and the special position gold has occupied relative to silver and platinum despite the fact that these other metals have similar characteristics.
In fact, institutional adoption started in earnest first with hedge funds allocating to BTC as an effective hedge for inflation and the dollar, often allocating from their gold bucket into BTC. This was followed by corporates like Micro-strategy and Tesla, who made large allocations from their corporate treasuries. This trend has continued, and as it accelerates it will be a significant driver of BTC appreciation.
As can be seen in the graph above, if 10% of the current market cap of gold was to transfer to Bitcoin exposure, it would translate into significant appreciation of the price of Bitcoin.
Looking at the rest of the digital asset universe, in order to invest intelligently it is necessary to understand the various underlying protocols’ business models and evaluate each case individually. For example: will Ethereum continue to be the primary go-to network for smart contracts or will it be usurped by the many challengers, like Cardano? Will it be the myspace or Facebook of smart contract protocols? Will Solana, as a protocol to optimize scalability and enabling development of dApps (decentralized applications), be the winner and so it goes on, Binance, Polkadot, Uniswap…
To answer these questions requires deep understanding of the digital asset ecosystem. The key question is, how to invest in digital assets in a thoughtful way to participate in
the fast-growing market that has provided extraordinary opportunity for outsized returns?
My strong conviction is that investors who are new to this space will inevitably want to start with exposure to Bitcoin, the best-known and largest digital asset. The characteristics that I have already mentioned, combined with its uncorrelated returns, means BTC can be a useful asset allocation diversifier.
Simple regulated investment options for BTC are few. Recently, exchange traded notes
(ETNs) and exchange traded products (ETPs) in Europe, and ETFs in Canada have been one way to invest. This approach provides passive exposure to BTC but is still relatively expensive for passive trackers. Another approach is to invest in an actively managed income and growth strategy which applies a covered call options strategy on BTC to allow for payment of a monthly dividend of over 1% per month, creating an income stream and smoothing the monthly volatility. This strategy captures the majority of the monthly appreciation of BTC and a premium which can then be paid out as a dividend. The investor is still exposed to BTC but can also benefit from the substantial income.
For those who want a broader and more diversified beta exposure to the digital asset market, there are various tracker products which will track a basket of five to 10 tokens. It is important to keep in mind that Bitcoin represents 40-50% of market cap of the digital asset market.
It is important to remember that this is a market which is evolving at unprecedented speed and it is a complex and varied ecosystem with new investment opportunities arising monthly. I encourage anyone who is considering investing seriously in this space to avail themselves of experienced professionals like Wave Financial, who are regulated, compliant, transparent and most importantly give priority to acting as a fiduciary in the best interest of the investor.
