Some will argue it’s premature for cryptocurrencies to form part of individual investment portfolios. Sean Sanders, founder of investment platform Revix, strongly disagrees.
By Ciaran Ryan 24 Aug 2020 00:31
Investors are entering the final stretch of 2020 worried about stocks and bonds, and that’s forcing them to look for alternative sources of return. Image: ShutterstockInvestors are entering the final stretch of 2020 worried about stocks and bonds, and that’s forcing them to look for alternative sources of return. Image: Shutterstock
“Holding a diversified cryptocurrency portfolio that makes up 1% to 5% of your broader investment portfolio, which may include shares, bonds, gold and property, statistically improves your risk-adjusted returns while adding valuable diversification benefits including rand hedge properties,” says Revix founder Sean Sanders.
Revix, backed by JSE-listed Sabvest, has made it possible to invest in cryptocurrencies through its investment platform that offers a fully gold-backed crypto-commodity called PAX Gold, a Top 10 crypto Bundle that is weighted equally across the 10 largest cryptos by market cap, a Smart Contract Bundle that features the top 5 ‘smart contract’ enabled cryptos and a Payment Bundle that tracks the top 5 cryptocurrencies that are looking to revolutionise payments.
Sanders says despite some initial scepticism over cryptocurrencies as a viable asset class, major investment firms are now coming on board which include Fidelity, JP Morgan and legendary hedge fund investor Paul Tudor Jones. “Today they have a better understanding of the risks and volatility associated with this new asset class, but they also recognise the potential that exposure to cryptos can have on lifting overall performance,” he says.
“If you zoom way out and look at your investment portfolio as a whole you’ll be able to evaluate how diversified you are. If anyone of your investment categories [like stocks or property] had to fall 50%, how much will this impact your overall portfolio’s returns? Ideally, you would want this impact to be as small as reasonably possible and that’s where diversification comes in.”
Major stock market valuations are looking fairly stretched, sitting at record highs. Bonds are at the tail end of a 38-year bull market with likely little upside remaining. In fact, Morgan Stanley recently put out a major report suggesting that a traditional portfolio made up of 60% stocks and 40% bonds will deliver a 2.8% annual return over the next 10 years, the lowest level in nearly a century. Bank of America is so bearish that it published a report called ‘The End of 60/40’. In their words: “The future of asset allocation may look radically different from the recent past.”
Investors are entering the final stretch of 2020 worried about stocks and bonds, and that’s forcing them to look for alternative sources of return.
Enter alternative assets.
The recent crypto market performance has been remarkable. Bitcoin is up over 60% in 2020 on a year-to-date basis. This price boom pushes its returns ahead of traditional assets like gold (up ~27%) and the S&P 500 (up ~4%).
As impressive as Bitcoin’s returns have been it still lags behind the returns of the broader crypto market. Revix’s Top 10 Bundle, which provides equally weighted access to the top 10 largest cryptocurrencies as measured by market capitalisation, has risen over 150% since the start of 2020.
Traditionally, alternative investments were accessible only by institutional investors, however, in recent years advances in fintech have changed this.
Revix has upended this paradigm by enabling anyone to invest in its ready-made crypto bundles from as little as R500 in just a few clicks.
Sanders says as with any new investment class, a lot of time is spent explaining the risks and potential returns.
So why is crypto unique?
It combines four features that are rare in a single investment:
1. High potential returns
Bitcoin is up over 60% year to date, Ethereum is up over 200%, and the entire crypto market is up over 1 000% over the past three years. While that’s no guarantee that this past trend will continue, cryptocurrencies’ 10-year track record suggests it’s here to stay, and many believe it’s just getting started. Revix’s crypto bundles have outperformed Bitcoin this year with triple-digit gains year to date as lesser-known cryptocurrencies including Chainlink (+850%) and Cardano (+290%) have begun to challenge Bitcoin’s dominance.
2. Extremely low correlations to other investments
Crypto has little to no correlation to other investments. There’s a good reason for this low correlation: like commodities, crypto has different drivers and risk factors. “User adoption, blockchain processing speeds and regulatory developments impact cryptocurrency prices while economic growth, interest rates and unemployment amongst other factors impact the returns of more traditional investments. The drivers are entirely different,” says Sanders.
Most alternative assets are illiquid, meaning that you cannot sell out of them quickly or easily. Cryptos, however, trade 24/7, 365 days of the year, meaning that you can sell out your investment whenever it suits you. Revix also allows you to sell out of your crypto bundles and withdraw your funds at any time. There are no lock-up periods like with most investment funds.
4. What about risk-adjusted returns?
If we look at what would happen if you added just a 1% allocation of the Revix Top 10 Bundle to a traditional portfolio made up of 60% stocks and 40% bonds, the results are actually quite remarkable. Despite the extreme volatility of cryptos since 2017, a 1% allocation to the Revix Top 10 Bundle over this period boosted the portfolio’s returns by 21.15% while only modestly increasing the portfolio’s volatility.
It may seem counterintuitive to suggest that a volatile asset class like crypto can significantly boost overall portfolio returns with little added risk. But the answer lies in the uncorrelated returns and the daily liquidity that crypto offers.
“As most fund managers know, adding uncorrelated assets to a portfolio tends to reduce risk, because uncorrelated assets zig when the rest of the portfolio zags. But adding liquid uncorrelated assets magnifies that impact because it allows you to rebalance the portfolio: buying when the market is low, and selling when the market is high, capitalising on crypto’s volatility,” says Sanders.
If there’s one thing we can learn from the evolution of the internet and other technologies, it’s that it just takes some time before ideas are turned into actual usable products and crypto seems to be doing just that.