Why Should Digital Assets Be An Asset Class?
By Grayscale
Nov 15, 2018
Digital Assets
Nov 15, 2018
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“It’s not every day, or every decade, that an entirely new asset class is born. Yet, through a combination of computer science, cryptography, economics, and network theory, digital assets have arrived and are proving that they are an asset class unlike any other. " – Matt Beck, Grayscale Investments
When deciding whether to add a new asset/security to one’s portfolio, the optimal risk/return ratio can be found on the efficient frontier.
Digital assets may represent the “missing piece” in asset allocation
- Optimal beta portfolio may lie higher on the efficient frontier than previously thought
- Present a new investment opportunity uncorrelated to other asset classes
- Represent an asset class to which investors are generally under-allocated
Source: “A New Frontier: How Digital Assets are Reshaping Asset Allocation.” Matt Beck, June 2018
Why Invest in Cryptocurrencies?
Store of value characteristics:
Similar to real assets such as gold, digital assets like bitcoin exhibit store of value properties and other characteristics of sound money. These include durability, scarcity, divisibility, portability, fungibility, verifiability and recognizability.
Spending characteristics:
Similar to cash, digital currencies like bitcoin can be spent on goods and services, with over 100,000 merchants worldwide accepting them, including PayPal and Microsoft.
Growth characteristics:
As real applications for blockchain technology and digital assets continue to grow, digital assets have the potential to provide wealth preservation and accumulation concurrently.
Low correlation with other markets:
Most cryptocurrencies exhibit a low correlation to traditional assets. In fact, Figure 1 suggests that the average correlation with traditional asset classes and currencies is 0.11. The maximum correlation is 0.44 and the minimum is -0.24.
Therefore, as an asset class, cryptocurrency can potentially provide uncorrelated returns to investors.
Figure 1. Multi-Asset Correlation Matrix
December 31, 2016 through October 31, 2018, Based on rolling one-month returns
