JP Morgan has outlined three key reasons why investors should add bitcoin to their investment portfolios. Small allocations to cryptocurrencies would â€œimprove portfolio efficiency due to high returns and moderate correlations,â€ JPMorganâ€™s analyst explained.
JP Morgan Sees Benefits of Hedging With Bitcoin
JPMorgan released a report last week entitled â€œWhat cryptocurrencies have and havenâ€™t done for multi-asset portfolios.â€ Published by the firmâ€™s head of Cross-Asset Strategy division, John Normand, the report explores cryptocurrenciesâ€™ use for portfolio diversification.
Firstly, the report acknowledges that â€œBitcoin has already achieved the fastest-ever price appreciation of any must-have asset to which it is often compared,â€ such as gold in 1970s, Japanese equities in 1980s, U.S. tech stocks in 1990s, Chinese equities in 2000s, commodities in 2000s, and FANG stocks in 2010s.
While noting that bitcoin is highly volatile, the analyst hypothetically asked: â€œWhy bother considering an unconventional and high-volatility hedge?â€ He then answered his own question by giving three reasons.
Firstly, â€œEquity and credit valuations look record-rich for a very young business cycle,â€ the report details. Secondly, â€œconventional hedges like DM bonds barely serve as insurance when US 10Y rates are near 1%.â€ The report elaborates that the collapse of DM bond yields to negative levels in Japan and Europe and to 1% in the U.S. has forced investors to focus on alternative investments.
The third reason concerns â€œsome as-yet unseen shocks (materially higher inflation, economically-debilitating cyber attacks or climate catastrophes),â€ which the JPMorgan analyst believes â€œcould favor an asset that operates outside conventional financial channels.â€ For example, Normand cited extraordinary monetary and fiscal stimulus over the past year, which creates general concerns about portfolio vulnerability to a macro or policy shock.
The JPM analyst further asserted that â€œthe mainstreaming of crypto ownership is raising correlations with cyclical assets, potentially converting them from insurance to leverage.â€ Nonetheless, he noted that for long-term portfolio efficiency:
As for shorter-term diversification, Normand wrote: â€œOver shorter intra-month and intra-quarter horizons, crypto assets continue to rank as the poorest hedge for major drawdowns in global equities, particularly relative to the fiat currencies like the dollar which they seek to displace.â€ In addition, he was quoted as saying:
Meanwhile, another JPMorgan analyst has forecasted that the price of bitcoin will reach $146K as competition between the cryptocurrency and gold heats up. Earlier this month, JP Morgan said that the approval of a bitcoin exchange-traded fund (ETF) this year could cause a price drop. Nonetheless, the firm sees $600 billion demand from global institutional investors for bitcoin.
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