Investment strategy: (No) cryptocurrencies

The Economico standard portfolios are deliberately lean in terms of asset classes. Many asset classes are not included. Two prominent examples will be discussed in the next two flashes: cryptocurrencies and private market investments (private equity).

Do cryptocurrencies belong in a portfolio? Honestly – I don't know. Proponents compare the development of cryptocurrencies with the emergence of the internet at the end of the last millennium and see the high volatility and constant changes in the pecking order of this industry (see chart of the week) as similar to the dotcom crisis of 2003 – typical side effects of the unstoppable rise of a new, groundbreaking technology. Opponents draw parallels with the Dutch tulip mania of 1636/37 – one of the largest speculative bubbles in economic history. Then as now, critics argue that the behaviour of market participants is driven by herd behaviour, or the modern term FOMO (fear of missing out).

Back to the basics: The return of any capital investment consists of a return component and a price appreciation component. The return component can be derived from the yield to maturity in the case of nominal assets, from earnings or dividend yield in the case of equities, and from usage or rental income in the case of real assets such as real estate – less costs. The price component is positive when demand for the asset exceeds supply, and vice versa. Predicting price changes therefore requires predicting demand and supply behaviour. Value investors focus on assets with strong capital returns and accept price fluctuations as largely unpredictable background noise.

Investments in cryptocurrencies – apart from staking or mining income, which involve additional costs and risks – are investments without capital returns and therefore pure price bets. This price bet can only work if demand for cryptocurrencies continues to grow steadily. Anyone participating in such speculation must therefore be convinced of this sustained demand growth.

Finally, implementation: cryptocurrencies can be purchased directly by setting up a «wallet». Various technology providers offer wallet services. Indirect investment involves exchange-traded funds (ETFs) that invest either in individual cryptocurrencies or in a basket or index of cryptocurrencies. Be aware of the costs – the TER of such vehicles ranges from around 0.2% to more than 2%. If you wish to include cryptocurrencies in your discretionary asset management mandate, discuss this with your provider. Several providers within the Economico provider universe explicitly offer this option.