JP Morgan gives three main reasons why investors should add bitcoin to their investment portfolio. A small allocation to cryptocurrencies will “increase portfolio efficiency due to high returns and moderate correlation,” said JPMorgan analysts.
JP Morgan Sees Benefits of Hedging With Bitcoin
JPMorgan released a report last week titled “What cryptocurrencies have and haven’t done for multi-asset portfolios.” Published by the head of the company’s Cross Asset Strategy division, John Normand, the report explores the use of cryptocurrencies to diversify portfolios.
Before discussing the reasons for having BTC in a portfolio, the report acknowledges that “Bitcoin has achieved the fastest-ever price appreciation of a must-have asset that is often compared,” such as gold in the 1970s, Japanese equities in the 1980s, Stocks US technology in the 1990s, Chinese equities in the 2000s, commodities in the 2000s, and FANG stocks in the 2010s.
While noting that bitcoin is highly volatile, analysts hypothetically ask: “Why bother considering unconventional and high-volatility hedging?” He then answered his own question by giving three reasons.
First, “Equity and credit ratings appear record-rich for a very young business cycle,” the report details. Second, “conventional hedges like DM bonds barely function as insurance when the US 10T interest rate approaches 1%”. The report explains that falling DM bond yields to negative levels in Japan and Europe and to 1% in the US has forced investors to focus on alternative investments.
A third reason concerns “some unseen shock (materially higher inflation, a cyber-attack that weakens the economy, or a climate catastrophe),” which JPMorgan analysts believe “could support assets operating outside conventional financial channels.” For example, Normand cites the extraordinary monetary and fiscal stimulus over the past year, which created general concerns about the vulnerability of portfolios to macro or policy shocks.
JPM analysts further assert that “mainstreaming crypto holdings increases the correlation with cyclical assets, potentially turning them from insurance to leverage.” Nonetheless, he notes that for long-term portfolio efficiency:
Small allocations (up to 2%) to cryptocurrencies still improve portfolio efficiency due to high returns and moderate correlation.
Meanwhile, another JPMorgan analyst predicts that the bitcoin price will hit $146K as the competition between cryptocurrencies and gold heats up. Earlier this month, JP Morgan said that approval of this year’s bitcoin exchange-traded fund (ETF) could lead to a price drop. Nonetheless, the company saw $600 billion in demand from global institutional investors for bitcoin.