During their early stages of development, digital assets have been treated in a manner that’s similar to how technology and commodities have been treated, according to CoinShares, a crypto-asset management company that provides financial products and services for professional investors.
A new report from CoinShares states that the financialization of crypto-assets is supported by appropriate infrastructure development and product integration.
The report argues that Bitcoin (BTC), the flagship cryptocurrency, is now evolving from “tech stock growth behavior” and is beginning to mature into a store of value or SoV.
The CoinShares team recommends:
“A Bitcoin portfolio weight of just under 4% is optimal in a traditional 60/40 portfolio. Bitcoin’s investment characteristics have historically made it attractive both as a driver of returns and a portfolio diversifier.”
The report points out that, since 2012, the number of BTC addresses that have been dormant for over a year has increased by more than 2x. Meanwhile, prime brokerages, order management systems and insured custody providers have supported the “increasing financialization” of assets via products like options contracts, futures and exchange traded products (ETP), the report noted.
The CoinShares team states:
“We see Bitcoin as an investment being a non-sovereign store of value which has potential exposure to economic growth but is largely uncorrelated to other asset classes.”
They also mention that the number of investors holding Bitcoin for at least a year (or more) has increased from 30% back in 2012 to currently around 60%. The CoinShares team predicts that this trend of investor participation will probably continue as Bitcoin’s total market cap keeps growing while its volatility keeps declining.
The report’s authors argue:
“Many attempts have been made to fit bitcoin into pre-existing frameworks of current asset classes, but due to its unique collection of similar yet often non-overlapping attributes, it never quite fits any established mould.”
According to CoinShares, Bitcoin is a “unique asset” and they think it’s an “effective diversifier in multi-asset portfolios.”
They also state that if Bitcoin’s financialization continues, it’s unlikely that it will be “insulated from the social and financial system.” They believe it’s “inevitable” that Bitcoin will exhibit an increased correlation with the performance of other asset classes during times of crisis. They note that this exact outcome was seen during the COVID-19 related panic of March 2020.
However, it’s worth noting that many Bitcoin-focused projects have shut down following the Coronavirus outbreak. Digital asset hedge fund Adaptive Capital closed down its operations in March 2020.
Adaptive Capital was a self-described “multi-strategy cryptocurrency hedge fund with a deep focus on on-chain analytics.” The hedge fund predicted that crypto-assets would become a major macro asset class and on-chain analysis of capital flows and network health would enhance crypto-asset portfolio management significantly.
The company wrote (when it shut down):
“Adaptive has made the decision to close operations and return the remaining funds to investors. We are convinced that the risks of continuing operations in such an unstable environment outweigh the potential benefits.”
More recently, Tuur Demeester’s Bitcoin and crypto focused Adamant Capital, which managed around $10 million in assets for various clients, also shut down quietly.
In December 2017, Meltem Demirors, the Chief Strategy Officer at CoinShares, had inaccurately predicted that Bitcoin would continue to perform positively in 2018. Although BTC had briefly surged to nearly $20,000 in December 2017, the leading cryptocurrency crashed along with the rest of the digital asset market in 2018 – which was one of the longest bear markets the industry has ever seen.