Powerful diversifier or portfolio kryptonite?In their latest Megatrends paper, PGIM calls cryptocurrency ‘portfolio kryptonite’ but sees opportunities in broader ecosystem. View the complete paper here.
NEWARK, N.J.–(BUSINESS WIRE)–The latest crypto collapse — in large part driven by poor design of a so-called “stablecoin” — highlights just one of the many reasons why cryptocurrency is a poor choice for long-term investors, according to PGIM, the $1.4 trillion global investment management business of Prudential Financial, Inc. (NYSE: PRU).
In PGIM’s latest Megatrends paper, “Cryptocurrency Investing: Powerful Diversifier or Portfolio Kryptonite?” dozens of investment professionals from across PGIM’s fixed income, equity, real estate, private debt and alternatives businesses dissect the most common pro-cryptocurrency arguments and find that direct investment in cryptocurrencies offers little benefit to an institutional investor — while adding considerable volatility and risk.
“As long-term investors and fiduciaries on behalf of our clients, three things need to be true for us to add an asset class into a portfolio: the asset needs a clear regulatory framework, it needs to be an effective store of value, and it needs to have a predictable correlation with other asset classes,” says PGIM CEO David Hunt. “Cryptocurrency currently meets none of these three criteria. It’s much more of a speculation than an investment.”
The PGIM research shows that cryptocurrency is an unreliable portfolio diversifier and an inadequate safe-haven asset or inflation hedge. Recent risk-adjusted returns are not much different than other asset classes but with more frequent and greater drawdowns. Furthermore, the unsettled regulatory backdrop and the significant environmental, social and governance concerns pose significant additional headwinds for long-term investors.
“Cryptocurrency may be a heroic quest to build a viable, decentralized peer-to-peer payment system, but its pricing is based on speculative behavior, rather than a fundamental thesis around its value or utility,” says PGIM Head of Thematic Research Shehriyar Antia. “Furthermore, with little evidence to support it as an effective inflation hedge or safe-haven asset, we see no reason for cryptocurrencies to be a part of institutional portfolios.”
Busting Cryptocurrency Myths
Cryptocurrency is not an effective hedge against inflation: In 2021, the price of bitcoin and other cryptocurrencies moved with inflation only for a brief time before falling sharply. Gold, on the other hand, has demonstrated since the 1970s that it can be an effective and reliable inflation hedge.
Bitcoin does not function as a safe-haven asset: Bitcoin, the most prevalent cryptocurrency, was not a steadying force in early 2020 when global asset prices spiraled downward due to worldwide COVID-induced shutdowns. It held far less of its value than conventional safe-haven assets.
Cryptocurrencies clash with ESG objectives: A single transaction on the bitcoin blockchain is equivalent to 2 million transactions on the Visa network, or roughly the same energy needed to power the average American home for over two months. From a governance perspective, the anonymity and difficulty in tracing identity of owners makes it a preferred medium of exchange in illicit activity — such as the potential for skirting sanctions in the wake of Russia’s invasion of Ukraine.
Tangible Opportunities In Blockchain Technology
“Cryptocurrency gets all the breathless hype, but it’s the underlying technology where we find the most interesting investment opportunities,” says Taimur Hyat, chief operating officer for PGIM. “Firms that enable real-world blockchain applications like clearing and settling transactions, preventing fraud, and tokenizing real assets offer significantly greater creation of value over the next decade. The old axiom applies — when there’s a gold rush, invest in shovels and pickaxes.”
Private blockchains and smart contracts: Distributed ledger technology and smart contracts can revolutionize elements of financial services, logistics, and supply chain management, as they eliminate the need for counterparty and trade verification as well as transaction and record reconciliation.
Next-generation securitization: The tokenization of real estate and infrastructure assets could substantially reduce costs from transactions and servicing, increase liquidity, simplify transactions, enhance price transparency, and allow more granular portfolio construction.
The infrastructure and ecosystem supporting blockchains and future central bank digital currencies: Collateral innovation in areas such as fraud prevention, regulatory compliance and other key enablers of the broader crypto ecosystem has the potential to generate attractive returns for owners of the companies that provide these services.
To learn more, read “Cryptocurrency Investing: Powerful Diversifier or Portfolio Kryptonite?” the latest in PGIM’s Megatrends research series.
PGIM, the global asset management business of Prudential Financial, Inc. (NYSE: PRU), ranks among the top 10 largest asset managers in the world1 with more than $1.4 trillion in assets under management as of March 31, 2022. With offices in 17 countries, PGIM’s businesses offer a range of investment solutions for retail and institutional investors around the world across a broad range of asset classes, including public fixed income, private fixed income, fundamental equity, quantitative equity, real estate and alternatives. For more information about PGIM, visit pgim.com.
Prudential Financial, Inc. (PFI) of the United States is not affiliated in any manner with Prudential plc, incorporated in the United Kingdom, or with Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom. For more information please visit news.prudential.com.
1 Prudential Financial, Inc. (PFI) is the 10th largest investment manager (out of 477 firms surveyed) in terms of global assets under management based on Pensions & Investments’ Top Money Managers list published on May 31, 2021. This ranking represents global assets under management by PFI as of Dec. 31, 2020.