Investment Insight | Portfolios profit from cryptocurrencies
On 13 May, NZ Funds sold and hedged its cryptocurrency exposure. We exited Bitcoin at approximately US$55,000 per coin (currently US$41,000) and Ethereum at approximately US$4,100 per coin (currently US$2,900). For growth category investors, the current exposure to cryptocurrency is now less than 0.70%.
We are long-term supporters of the future of digital currencies but the volatility risks inherent in this asset class are acknowledged and we manage the positions actively.
Active management approach to investing in cryptocurrencies
Our approach to investing in cryptocurrency utilises several active management techniques. First, our investment decision is made following detailed research. We look to understand the asset class including its competitive advantages, total addressable market, growth opportunities and risks. On concluding that we see attractive upside returns compared to the potential downside, we will look to make an investment.
Cryptocurrency’s volatility and downside risks are high. However, there is no other asset class that offers the level of potential upside as assets such as Bitcoin and Ethereum. The current market capitalisation of all cryptocurrencies is just US$1.7 trillion. This is just a fraction of the size of the market capitalisation of all United States listed shares which is approximately US$49 trillion. The global economy is at the early stages of digitalisation and we believe there is significant room for growth in cryptocurrency.
After making the decision to invest in cryptocurrency, the volatility of the asset class dictates the size of the position in clients’ portfolios. Once we have sized the position, we use several tools to guide us on whether to add or reduce even if our long-term investment thesis has not changed.
April | Switch from Bitcoin to Ethereum
In mid-April we began rotating our Bitcoin exposure to Ethereum. In the article 16 April 2021 | NZ Funds invests in Ethereum we set out the reasons why Ethereum is an attractive digital asset.
It was becoming clear that institutional investors were increasing their focus on Ethereum. In the same way the institutionalisation of Bitcoin has been a key driver of the current Bitcoin bull market, we saw similar signs in Ethereum.
Institutional investor interest in Bitcoin has led to a greater understanding of the digital currency landscape. Ethereum is the next logical cryptocurrency to be of interest to institutional investors given its large market cap and its broader potential use cases. This led us to reduce our Bitcoin exposure in favour of Ethereum.
May | Sold cryptocurrency exposure
In early May we sold and hedged out clients’ Ethereum and remaining Bitcoin exposure. The four key catalysts for this decision were:
1. Bitcoin’s price momentum had stalled with it still trading at around the same level it reached in mid-February.
2. Irrational investor speculation across multiple minor cryptocurrencies is present; for example, the rise of Dogecoin to a market capitalisation of over US$80bn. This is difficult to justify given it was started as a joke and does not have a material value proposition.
3. For the first time in over 12 months, several technical indicators began to turn negative. A key signal was the speed of new investor inflows into listed Bitcoin funds that had been steadily declining since January and turned negative in May.
4. Several negative news headlines acted as catalysts to start a more severe liquidation of cryptocurrency assets, including from Tesla’s Elon Musk who said they will no longer accept Bitcoin as payment.
We remain supportive of cryptocurrency long term
Even though we have sold and hedged clients’ cryptocurrency exposure, we remain long term supporters of this exciting asset class.
All asset classes trade in cycles and selloffs occur when investor optimism reaches sustainably high levels. We retain a modest 0.7% exposure and may increase exposure to this once we see more orderly behaviour reflective of the continued digitisation of the global economy.
We are long-term supporters of the future of digital currencies but the volatility risks inherent in this asset class are acknowledged and we manage the positions actively.
Active management approach to investing in cryptocurrencies
Our approach to investing in cryptocurrency utilises several active management techniques. First, our investment decision is made following detailed research. We look to understand the asset class including its competitive advantages, total addressable market, growth opportunities and risks. On concluding that we see attractive upside returns compared to the potential downside, we will look to make an investment.
Cryptocurrency’s volatility and downside risks are high. However, there is no other asset class that offers the level of potential upside as assets such as Bitcoin and Ethereum. The current market capitalisation of all cryptocurrencies is just US$1.7 trillion. This is just a fraction of the size of the market capitalisation of all United States listed shares which is approximately US$49 trillion. The global economy is at the early stages of digitalisation and we believe there is significant room for growth in cryptocurrency.
After making the decision to invest in cryptocurrency, the volatility of the asset class dictates the size of the position in clients’ portfolios. Once we have sized the position, we use several tools to guide us on whether to add or reduce even if our long-term investment thesis has not changed.
April | Switch from Bitcoin to Ethereum
In mid-April we began rotating our Bitcoin exposure to Ethereum. In the article 16 April 2021 | NZ Funds invests in Ethereum we set out the reasons why Ethereum is an attractive digital asset.
It was becoming clear that institutional investors were increasing their focus on Ethereum. In the same way the institutionalisation of Bitcoin has been a key driver of the current Bitcoin bull market, we saw similar signs in Ethereum.
Institutional investor interest in Bitcoin has led to a greater understanding of the digital currency landscape. Ethereum is the next logical cryptocurrency to be of interest to institutional investors given its large market cap and its broader potential use cases. This led us to reduce our Bitcoin exposure in favour of Ethereum.
May | Sold cryptocurrency exposure
In early May we sold and hedged out clients’ Ethereum and remaining Bitcoin exposure. The four key catalysts for this decision were:
1. Bitcoin’s price momentum had stalled with it still trading at around the same level it reached in mid-February.
2. Irrational investor speculation across multiple minor cryptocurrencies is present; for example, the rise of Dogecoin to a market capitalisation of over US$80bn. This is difficult to justify given it was started as a joke and does not have a material value proposition.
3. For the first time in over 12 months, several technical indicators began to turn negative. A key signal was the speed of new investor inflows into listed Bitcoin funds that had been steadily declining since January and turned negative in May.
4. Several negative news headlines acted as catalysts to start a more severe liquidation of cryptocurrency assets, including from Tesla’s Elon Musk who said they will no longer accept Bitcoin as payment.
We remain supportive of cryptocurrency long term
Even though we have sold and hedged clients’ cryptocurrency exposure, we remain long term supporters of this exciting asset class.
All asset classes trade in cycles and selloffs occur when investor optimism reaches sustainably high levels. We retain a modest 0.7% exposure and may increase exposure to this once we see more orderly behaviour reflective of the continued digitisation of the global economy.
Source: Bloomberg.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
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James Grigor is Chief Investment Officer for New Zealand Funds Management Limited (NZ Funds) and a member of the NZ Funds KiwiSaver Scheme. James' comments are of a general nature, and he is not responsible for any loss that any reader may suffer from following it.
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