Table of Contents
JPMorgan has advised Investors to put 1% of their portfolios in bitcoin despite calling it a poor hedge.
This comes after saying that cryptocurrencies “rank as the poorest hedge for major drawdowns in equities, with questionable diversification benefits.”
JPMorgan explained that this could help “achieve any efficiency gain in the overall risk-adjusted returns of the portfolio,” according to the report; this was what the firm’s strategists explained.
These were the words from JPMorgan last week saying, “Investors can now allocate 1% of their portfolios to Bitcoin”.
The firm has now seen the benefits of adding a small percentage of bitcoin to a multi-asset portfolio. JPMorgan’s global head of research, Joyce Chang, and vice president of strategic research, Amy Ho, in a note to clients on Wednesday wrote:
“In a multi-asset portfolio, investors can likely add up to 1% of their allocation to cryptocurrencies to achieve any efficiency gain in the overall risk-adjusted returns of the portfolio.”
Furthermore, the strategists had to clarify that: “Cryptocurrencies are investment vehicles and not funding currencies.
So when investors are looking to hedge a macro event with a currency, we recommend a hedge through funding currencies like the yen or U.S. dollar instead.”
Although many analysts strongly believe that bitcoin provides a way to hedge against significant fluctuations in traditional asset classes, including stocks, bonds, and commodities, JPMorgan doubts that.
Until last week, the investment bank claimed bitcoin was an “economic sideshow,” adding to their report.
While Crypto assets continue to rank as the poorest hedge for major drawdowns in equities, with many questionable diversification benefits at prices that show so far above production costs, having correlations with cyclical assets is rising as crypto ownership is mainstreamed.
An Investment Turnaround with Bitcoin
JP Morgan also stated that bitcoin’s recent prices are well above the cryptocurrency’s fair value estimates.
The firm further asserted that mainstream adoption increases bitcoin’s correlation with cyclical assets, which rise and fall based on the economic changes.
This, in turn, reduces bitcoin’s benefits of diversifying portfolios. Nevertheless, its most recent report from this investment bank, JPMorgan, recommends that investors add a small percentage of bitcoin to their portfolios.
JPMorgan Believes The Demand For Bitcoin Will Increase
This investment bank has come a long way in talking about cryptocurrencies since its CEO Jamie Dimon called the cryptocurrency a fraud back in September 2017.
Just earlier this month, JPMorgan’s co-president Daniel Pinto stated that he is certain the demand for bitcoin “will be there at some point.”
The executive confirmed this: “If over time an asset class develops that is going to be used by different asset managers and investors, we will have to be involved.”
However, the firm’s analysts have predicted that bitcoin’s price could reach $146,000 as the cryptocurrency’s competition with gold is continually on the rise.
Wallstreet May Lose the Fight Against Crypto
Wall Street has not been a big supporter of Bitcoin so far, but bitcoin’s resistance seems to be cracking down.
JPMorgan has stated very cautiously which they are recommending investors consider adding the cryptocurrency to their portfolio.
“In a multi-asset portfolio, investors can likely add up to 1% of their allocation to cryptocurrencies to achieve any efficiency gain in the overall risk-adjusted returns of the portfolio,” the investment firm JPMorgan said in a note on Wednesday.
Bitcoin’s volatility has caused many investors to become wary over the past few months. Bitcoin’s rise up to date has jumped from $29,333 to $49,902 worth which, as of 12:40 p.m. ET on Thursday, bitcoin peaked, and it had reached as high as $57,000.
Last week, which caused the market cap to top $1 trillion.
Bitcoin price is currently at $51,746.00 as of the time of writing.
Bitcoin Acts As a Diversification Tool In a Portfolio Says JPMorgan
Elon Musk made a shocking revelation recently when it was announced that Tesla had bought $1.5 billion in Bitcoin.
Fortune’s Shawn Tully calculates that the company Tesla has made more money on its Bitcoin stash than it has actually made through the business of selling cars and batteries this year.
Because the digital currency isn’t yet backed by anything substantial, some of the investors have doubted its power to stay for long.
Though its boosters in the past years have touted it as a hedge against inflation, which doesn’t seem to be the main case, given how it has traded recently, however, JPMorgan has advised its investors that bitcoin can act as a diversification tool in a portfolio, only if the investor has just a small interest in Bitcoin.
JPMorgan is not the first investment bank to show interest in Bitcoin.
BNY Mellon announced its plans earlier this month to create a new team responsible for developing a custody and administration platform for traditional and digital assets.
This will be considered an investment unit of which Morgan Stanley is also considering whether to count on Bitcoin.
JPMorgan Investors Will Wade Into Bitcoin Waters Soon
Furthermore, analysts from the finance house have made a broad statement on hedging investments to investor portfolios, according to a note made by the team of financial analysts recently, which represents JP Morgan, Bitcoin’s current status functions as an uncorrelated hedge to the broader market.
As stated by the analysts, a team which included Joyce Chang and Amy Ho, “In a multi-asset portfolio, investors can likely add up to 1% of their allocation to cryptocurrencies to achieve any efficiency gain in the overall risk-adjusted returns of the portfolio.”
Big Investors Have Begun to Carve Their Share Of Bitcoin
Based on reports, bitcoin has risen at least five times in the past year, and Bitcoin’s continuous rise has prompted prominent investors like Elon Musk, Paul Tudor Jones, and Stan Druckenmiller have dived in for their share.
Companies such as MicroStrategy and BNY Mellon have also revealed their Bitcoin positions. In general, the average number of active users of cryptocurrencies has also risen significantly since December of 2020, which has added to over 15 million more users overall.
Strategists have raced the apex cryptocurrency as a feasible means of hedging against significant fluctuations in charts for traditional asset classes.
JPMorgan recommends a 1% allocation for crypto based on observations of crypto’s, especially in Bitcoin’s highly volatile market, such that, in the case of a sudden move to a bearish turn, the effect would be seen as insubstantial to an investor’s current portfolio.
JPMorgan Still Views Bitcoin As An Off-Risk Asset
While JPMorgan still views Bitcoin as an off-risk asset like gold, the cryptocurrency’s correlative value currently expresses a 0.134 compared to the S&P 500.
Annabelle Huang, a partner at Amber Group, said: “Through the insatiable buy-side pressure from exchange-traded fund issuers, close-ended funds, and large public corporations adding Bitcoin to their positions, demand is massively outstripping supply.”
It is important to note that during the March 2020 market crash as the global pandemic of the COVID-19 , the cryptocurrency markets alongside Bitcoin also suffered a similar effect.
With a very sharp bearish turn bringing BTC prices to a closure which is as low as $5,000 in mid-March of 2020.
The correlation particularly rose to 0.54 during this period, opining that the two nominally unrelated markets are now considered as correlated to a certain degree based on the fact that investments often overlap across portfolios.
No Comment