Bitcoin Becoming Less-risky As An Investment, Novogratz Says

28 Oct 2020, 12:05 · Views 195

Investing big money into Bitcoin 10 years ago came with immense uncertainty. Now, buying the asset carries less risk, according to the ex-hedge fund manager.

Bitcoin (BTC) has gained significant notoriety in the decade since its 2009 launch. Big mainstream players such as MicroStrategy have recently begun to invest large sums of money into the asset, normalizing its viability as an investment for some. Mike Novogratz, CEO of Galaxy Digital, said Bitcoin is now an obvious financial play.

"On a risk-adjusted basis, BTC is an easier bet today than it has ever been," Novogratz said in an Oct. 27 tweet. "It’s being de-risked daily."

"Adjusted by its volatility, Bitcoin has presented the best return in one or two years against all other asset classes," Cointelegraph markets contributor Marcel Pechman said when asked to weigh in on Novogratz tweet. "Few investors expect gold to rally 60%, but it never went below -8% so the Sharpe index adjusts returns based on volatility.”

Although MicroStrategy bought more than $400 million worth of BTC in recent months, it is not the only mainstream giant to join the party. Square, headed up by Twitter CEO Jack Dorsey, purchased $50 million of Bitcoin recently, publicized on Oct. 8.

After disclosing his BTC holdings in May 2020, billionaire Paul Tudor Jones compared the asset to an investment in Apple before its boom.

With its mainstream involvement, including the traditional trading products being built around it, Bitcoin is much easier to gain financial exposure to today than it once was. Though it was originally designed as an alternative form of currency, Bitcoin has gained prevalence more as a store of value and investment option in recent years.

"I don't think Bitcoin is going to be used as a transactional currency any time in the next five years," Novogratz said in an interview with Bloomberg TV, posted on Oct. 23. "Bitcoin is being used as a store of value," he added. "People are worried that the central banks around the world are debasing fiat currencies."

The U.S. government, for example, printed a massive amount of its national currency in 2020 amid the COVID-19 pandemic; and action that could ultimately decrease the value of the American dollar as a whole.

Source: cointelegraph.com

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Any individual who followed Matt Damon’s advice that “fortune favors the brave” during the Super Bowl and invested $1,000 in the crypto markets have seen staggering losses, with the value of those assets dropping more than 60 %. This small slice of activity in the crypto markets demonstrates two major issues with this new asset class: its historical volatility and a lack of education about these assets among most would-be investors. Given that, as well as a cautionary regulatory environment, it’s clear that at this time, crypto has no place in defined-contribution plan lineups. This hasn’t stopped some DC plan administrators from soon making digital assets available to plan participants, if the plan sponsor decides to make this feature available. Read: This is why bitcoin won’t ‘diversify’ your 401(k) Defined-contribution plan sponsors will likely keep a close eye on these moves to make crypto more accessible to DC plan participants. For now though, we at Mercer do not view cryptocurrency or crypto-related assets as suitable investment options in a defined-contribution plan. Here are three key reasons why: 1. Volatility Proponents of cryptocurrencies point out that Bitcoin last year became the highest performing asset class of the decade, with an annualized return of 230 percent, when its price reached $60,000. But since then, its price has dropped precipitously, sitting at around $21,500 as of July 27. Of course, much of the stock market has entered bear market territory, bringing crypto along with it. But volatility is par for the course in crypto. According to a Mercer analysis, the annualized standard deviation of monthly returns of Bitcoin from 2015 to 2020 was approximately 80 percent, at least four times the volatility of publicly traded equities. Many experienced crypto investors may understand that these new markets reach new highs then crash in cycles, but it’s likely that most defined-contribution plan participants do not. Most participants don’t have the appetite for such high volatility—after all, as the primary vehicle that people rely on for their retirements, DC plans generally avoid making highly volatile asset classes available to participants on a stand-alone basis. Read: Why target-date funds may be sabotaging your retirement 2. Lack of education Given the amount of mainstream coverage around crypto, it can be assumed that these assets have become mainstream. However, only 16% of Americans said last year that they have invested in them. Based on Mercer’s work with some of the largest defined-contribution plan administrators, much is still to be done to educate plan participants on building a portfolio with crypto assets. This is vital, as learning about these markets can be confusing and time-consuming—a sobering fact in the face of Americans’ lack of financial literacy and their desire for professionals to help them plan for retirement. Learn how to shake up your financial routine at the Best New Ideas in Money Festival on Sept. 21 and Sept. 22 in New York. Join Carrie Schwab, president of the Charles Schwab Foundation. 3. The regulatory environment Although many in the crypto industry cheered when President Joe Biden signed an executive order in March instructing federal agencies to study and report on digital assets, there are plenty of reasons to be concerned that the regulatory environment around crypto may create more confusion in the markets. The day after the president’s order, the Department of Labor warned 401(k) plans to “exercise extreme care” about including crypto in portfolios. The agency wrote, “At this early stage in the history of cryptocurrencies, the Department has serious concerns about the prudence of a fiduciary’s decision to expose a 401(k) plan’s participants to direct investments in cryptocurrencies, or other products whose value is tied to cryptocurrencies.” The department cited crypto’s speculative and volatile nature as well as the difficulty to understand them as factors in its warning. (There is pending litigation against the DOL seeking to vacate this guidance, stating that where “assets may be invested should not be subject to the arbitrary whims of an agency that has no such authority.”)

Given the rapid decline of crypto markets, many believe regulators may soon place restrictions on the market. Hence, it’s prudent for defined-contribution plan sponsors to take a data-driven approach to including these assets in DC plan menus, despite a likely small minority of participants who may be requesting them. The crypto markets are constantly evolving, so it’s possible that the factors outlined above may be mitigated. But until then, we at Mercer feel that crypto does not belong in retirement accounts. Holly Verdeyen is partner and U.S. Defined Contribution Leader at asset management firm Mercer. Click here to see Mercer’s important notices.

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