Is Crypto about to replace your wealth manager?
Are you getting a little bored of stocks?
If you had invested in the FTSE 100 in January 2000 you would have bought it at a price of around 6930. At the time of writing, 21 years later, the same index is sitting at 7051. Fortunately, you would have received dividends which, had you reinvested and not been taxed on, would have boosted your return to 4% per year. Nothing to turn your nose up at but also nothing to get too excited about.
The last decade has also seen near zero interest rates so there is little yield available in the market with global bond funds also performing poorly in recent history.
Is there a new asset class on the block?
Cryptocurrency, the much derided and controversial new asset class, has been the clear leader in terms of investment returns over the past 5 years. However, the largest cryptocurrency, Bitcoin, has a daily volatility of 0%+ which will keep you awake at night if any large portion of your net worth is sitting in it.
If cryptocurrencies are to become a core component of a diversified portfolio, they need a different approach and, unsurprisingly, we can learn some valuable lessons from the world of traditional portfolio management.
Crypto Bonds (stablecoins)
A stablecoin is a cryptocurrency that has its value pegged to a real-world asset. For the purposes of this example, we would look at cryptocurrencies that have their value pegged to the price of USD or EUR. For every USD or EUR stablecoin there would be a USD or EUR sitting in a bank account to back it up.
These cryptocurrencies are nothing new with billions already in circulation. They are in high demand though from speculators and non-traditional borrowers who will pay high yields to borrow them for flexible time periods. Yields can be anywhere from 5-12% per year and the underlying asset fluctuates in line with the real-world currency.
In the recent market turmoil that saw cryptocurrencies drop as much at 60% in a little over a week, many investors reallocated capital into stablecoins to ride out the storm. Investors saw these assets, like bonds, as safe haven assets in times of financial turmoil.
Crypto Equities (bluechip crypto)
Bitcoin and Ether remain the two largest cryptocurrencies by market capitalisation. What many don’t know, is that they are also yield bearing assets. In terms of a return profile, the underlying asset (Bitcoin / Ether) is highly volatile, and you are hoping for capital appreciation, however, there is a stable income stream provided by the asset of anywhere between 2-0% in addition to any capital appreciation. This begins to look a lot like a dividend paying stock.
With these two crypto ‘asset classes’ in mind, you can quickly see how one might construct a crypto portfolio that, depending on your view on where crypto prices are going, would vary its exposure to crypto bonds and crypto equities. When you are feeling bullish on the crypto market you would up exposure to ‘equities’ and when bearish move more into ‘bonds’ much like in traditional asset management.
The above is easier said than done. Getting decent yields on your crypto can be complex, expensive and risky to the uninitiated. It is for this reason that we created AQRU. Our Auto AQRU product allows you to deposit fiat and invest in either stablecoin or BTC/ETH strategies. Funds can be removed at any time so you can switch asset classes daily if desired all from one simple-to-use platform.