The current cryptocurrency, mainly due to the flawed structure of a so-called “stablecoin”, illustrates just one of the many reasons why cryptocurrencies are a poor choice for long-term investors. This is the opinion of PGIM, the global investment manager for the insurance conglomerate Prudential, Inc. (NYSE 🙂 (LON 🙂 with more than $ 1.4 trillion in assets under management.
In PGIM’s latest Megatrends paper, “Cryptocurrency Investing: Powerful Diversifier or Portfolio Kryptonite?”, Numerous investment experts from PGIM’s Fixed Income, Equity, Real Estate, Private Debt and Alternatives companies analyze the most common arguments for investing in cryptocurrencies. They conclude that direct investment in cryptocurrencies provides institutional investors with few benefits, but entails high volatility and high risk.
“For us as a long-term investor and asset manager, three things must be true in the interest of our clients in order for us to include an asset class in a portfolio: the asset needs a clear regulatory framework, must be an effective investment and has a predictable correlation with others. asset classes, “he told PGIM CEO David Hunt. “Cryptocurrencies do not currently meet any of these three criteria. Instead of an investment, this is pure speculation.”
The PGIM study shows that investing in cryptocurrencies unreliably contributes to portfolio diversification, is an unsuitable safe haven investment and provides inadequate protection against inflation. In addition, the most recent risk-adjusted returns are not significantly different from the returns of other asset classes, but have slightly more frequent and more pronounced setbacks. For investors with a long-term orientation, the uncertain regulatory background and the significant concerns regarding ESG aspects also speak against cryptocurrencies.
“Cryptocurrencies can be a bold attempt to create a workable, decentralized peer-to-peer payment system, but their pricing is based primarily on speculation rather than sound theory of value or utility,” said Shehriyar Antia, head of thematic research at PGIM. . “In addition, there is very little evidence that cryptocurrencies are an effective inflation hedge or a safe haven, so we see no reason to include them in institutional portfolios.”
DISCOVERING THE MYTHS OF CRYPT CURRENCY
Cryptocurrencies are not an effective hedge against inflation: The price of cryptocurrencies and other cryptocurrencies only followed inflation for a short time in 2021 before falling sharply. That, on the other hand, since the 1970s has shown that it can provide effective and reliable protection against inflation.
Bitcoin does not work as a safe haven: The dominant cryptocurrency Bitcoin proved not to be a stabilizing force in early 2020 in light of the global corona-related lockdowns as securities prices fell globally. The cryptocurrency lost value more significantly than was the case with conventional safe-haven assets.
Cryptocurrencies collide with ESG targets: A single transaction on the Bitcoin blockchain is equivalent to two million transactions on the Visa network, or approximately the energy required to run an average American household for two months. From a management perspective, the anonymity and difficulty of tracking owners’ identities make Bitcoin a preferred means of exchange for illegal activities – such as B. Potential circumvention of sanctions following Russia’s invasion of Ukraine.
CONCRETE OPPORTUNITIES IN BLOCKCHAIN TECHNOLOGY
“Cryptocurrencies may be hyped, but the real investment opportunities are in the underlying technology,” said Taimur Hyat, Chief Operating Officer at PGIM. “Companies that enable real-world blockchain applications, such as clearing and settling transactions, preventing fraud and real-world asset tokenization, are expected to generate significantly more value over the next decade. The old saying goes: In a gold rush, do not invest in the gold diggers, invest in shovels. “
Private blockchains and smart contracts: Distributed Ledger (DLT) technology and smart contracts have the potential to revolutionize individual areas of financial services, logistics and supply chain management by eliminating the need for counterparty and trade verification and reconciling transactions and documentation.
Next generation securitization: Tokenization of real estate and infrastructure assets can significantly reduce transaction and administration costs, increase liquidity, simplify transactions, increase price transparency and enable more accurate portfolio construction.
Infrastructure and ecosystems to support the digital currencies of blockchains and future central banks: Further innovations in areas such as fraud prevention, compliance with legislation and other important factors in a comprehensive cryptoecosystem have the potential to provide attractive returns to companies providing these services.
For more information, see PGIM’s Megatrends Research Series: “Cryptocurrency Investing: Powerful Diversifier or Portfolio Kryptonite?”