Portfolio Perspective from the Investment Advisory Group - Truist
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Truist Advisory Services, Inc.
Portfolio Perspective from the Investment Advisory Group
Does bitcoin have a portfolio role?
May 6, 2021
Jeff Terrell, CFA Introduction
Sr. Analyst – Investment Strategy
Portfolio & Market Strategy The popularity of bitcoin and other cryptocurrencies has surged with the conversation entering
the mainstream; and investors and businesses are exploring uses for the technology. The
scope of the cryptocurrency topic is broad and complex. We initiate the conversation in this
commentary by exploring the merits of including bitcoin, today’s dominant cryptocurrency, as
Key highlights an asset class in portfolios that can help investors achieve their financial goals. Future articles
will cover other cryptocurrency-related topics as they develop.
• This is a rapidly developing
topic and the future may
provide better clarity. For now, Bitcoin background
bitcoin and other
cryptocurrencies are not a part
A payment system and an asset
of our current investment Bitcoin’s origin and purpose is to function primarily as a digital currency alternative to fiat
universe or asset allocation currencies (the U.S. dollar, euro and yen for example) issued and backed by global
process. economies and central banking systems like the Federal Reserve. Bitcoin’s value is driven by
• Bitcoin’s speculative appeal is the technology underlying its network and the supply-demand dynamics associated with it in
predicated on future returns the marketplace. The decentralized nature of Bitcoin was designed as a means of facilitating
mimicking past returns which is direct payments from peer to peer bypassing a central banking system such as the Federal
unlikely. Reserve while maintaining a permanent and anonymous record of all transactions.
• This twelve-year-old asset’s Bitcoin is the best-known application of highly complex blockchain technology. However, it is
volatility is still very high. It has only a subset of broader blockchain technology applications being used successfully today in
yet to establish reliable or
both the manufacturing and financial services sectors. This paper focuses solely on bitcoin’s
enduring relationships with the
evolving identity as a commodity, currency or potential future asset class and its merits as an
fundamental economic drivers
behind the returns, risks and asset class in an investment portfolio.
correlations among traditional With several thousand cryptocurrencies in existence today, bitcoin’s market capitalization is
asset classes and does not
larger than all the rest combined. For context, at a current market capitalization of roughly $1
contribute meaningful
diversification properties to a trillion, if bitcoin were a stock (which it is not) in the Standard & Poor’s 500 Index, it would rank
well-managed portfolio. as the 5th largest in market value between Google and Facebook.
• We’ll continue to monitor the What type of asset is bitcoin?
industry as it evolves and keep
an open mind, but at this point, Bitcoin doesn’t check all the boxes to be neatly categorized as a commodity, currency or
we recommend investors not asset class. Its construct and speculative nature are untethered to the fundamental economic
invest any money in factors that drive valuations for traditional financial assets. Bitcoin was designed with a supply
cryptocurrencies that they can’t
afford to lose.
Past performance does not guarantee future results.
Investment and Insurance Products:
• Are not FDIC or any other Government Agency Insured
• Are not Bank Guaranteed
• May Lose Valueconstraint, limiting the amount of coins that could be produced to only 21 million. As a result, a
primary value driver for bitcoin is the supply-demand dynamics among users and the
proprietary applications of its blockchain technology. Its relationship with other assets is more
coincidental than correlated at present.
Valuations for commodities such as energy, industrial metals or precious metals are largely
driven by their physical scarcity, abundance or demand at a given point in an economic cycle.
In this sense, perhaps bitcoin is most like a commodity given the supply-demand nature of its
value drivers. However, its weak relationship with normal economic cycles make a more
compelling case for classifying bitcoin as a speculative real asset.
Currencies typically must meet three qualifying criteria. They serve as a medium of
exchange, a unit of account and a store of value. Bitcoin is increasingly accepted as a means
of exchange but is not yet a medium of exchange with a commonly accepted value. Though
businesses such as Tesla accept bitcoin as a form of payment, broader mainstream
acceptance is a higher bar to cross. As it stands, bitcoin’s network speed and capacity would
be unlikely to handle everyday transactions globally. To illustrate, the average daily
transaction volume for bitcoin hovers at around 300,000 transactions per day whereas daily
credit card transactions settling through traditional banking channels exceed 1 billion per day.
A unit of account implies a commonly-valued standard by which any financial transaction is
measured. Bitcoin does not yet fulfill this standard for global trade or financial acceptance but
has gained momentum.
For a currency to serve as a time-tested store of value suggests a history of stability. The
table below spans 1,320 trading days from January 4, 2016 through March 31, 2021 showing
fund proxies for bitcoin, the S&P 500, commodities, gold and bonds revealing the percentage
of days each fund exceeded given volatility thresholds. Bitcoin, as represented by the
Grayscale Bitcoin Trust (GBTC), has gone up or down by over 3% more than half of all trading
days and by more than 5% for almost a third of all trading days in the last five years. During
this period, bitcoin has endured ten 30% corrections lasting an average of 40 days. This does
not yet satisfy the store of value yardstick in our view.
% of trading days exceeding volatility threshold
January 2016 - March 2021
Bitcoin has gone up iShares
Grayscale Invesco SPDR
or down by over 3% iShares Core U.S.
Bitcoin Commodity Gold
more than half of all Volatility Threshold S&P 500 Agg.
Trust Tracking ETF
trading days and by (IVV) Bond
(GBTC) (DBC) (GLD)
more than 5% for (AGG)
almost a third of all >1% 83.1% 21.7% 26.9% 19.0% 0.8%
trading days in the >2% 66.2% 6.3% 6.1% 3.2% 0.4%
last five years. >3% 50.8% 2.8% 1.0% 1.1% 0.2%
During this period, >5% 31.1% 0.8% 0.2% 0.1% 0.0%
Bitcoin has endured >10% 9.2% 0.1% 0.0% 0.0% 0.0%
ten 30% corrections.
>20% 1.3% 0.0% 0.0% 0.0% 0.0%
Data Source: Truist IAG, FactSet; Past performance does not guarantee future returnsBitcoin as an asset class
Bitcoin currently does not meet many of the criteria to be considered an asset class to
be included in a traditional investment framework. The core of our portfolio construction
process identifies key asset classes whose economic drivers are time tested, measurable and
transparent. Our annual Asset Class Outlook provides return-risk guidance for asset classes
that are informed by fundamental and macro-economic drivers. Our global economic, interest
rate, inflation, monetary policy, profit and credit outlooks directly impact the asset classes we
utilize for portfolio construction. These economic inputs have limited, if any, applications for
assessing the value or expected return-risk profile for bitcoin or other cryptocurrency assets.
Additional lenses used to evaluate asset classes include valuation fundamentals, the
macroeconomic environment, technical trends, and, of course, sentiment. Bitcoin does not
have cash flows, earnings or other physical properties helpful in valuing traditional assets. Its
limited history and disconnect with other macroeconomic trends make it difficult to analyze.
Technical analysis can be applied, but bitcoin’s lack of history and significant volatility place
limits on technical analysis as a reliable tool. Bitcoin’s primary investor appeal is the hope for
higher prices, which is sentiment driven. Investor sentiment alone is an insufficient reason to
consider bitcoin a legitimate asset class in a fiduciary portfolio at this time.
Arguments by bitcoin proponents
Proponents argue that bitcoin offers portfolio diversification by providing uncorrelated returns
against riskier portfolio assets, such as stocks, and that it is an effective inflation hedge. With
bitcoin’s limited history, we find no evidence for either argument.
We compared bitcoin’s monthly return history with other asset classes over the last three and
10 years to assess whether relationships have changed as it has matured. Bitcoin’s
correlations with stocks and commodities have risen in recent years suggesting it now
behaves more like a risky asset leveraging portfolio risk rather than an asset that buffers risk
in times of stress. However, bitcoin has recently gained modest momentum among
institutional investors potentially dampening bitcoin’s speculative profile in the future if volume
shifts toward institutions and away from high frequency day traders.
Bitcoin’s relationship with inflation as indicated by 10-year Treasury breakeven yields, has
actually become less correlated, thus perhaps losing what little benefit it may have had as an
inflation hedge. However, the inflation relationship is weak at best and perhaps even
coincidental given persistently low levels of inflation for the last several years.
CMBI Bitcoin index correlations with key asset classes
periods ending March 31, 2021
10 Year Correlations 3 Year Correlations
0.30
0.27
0.24
0.17
0.14
0.08 0.09
0.07
0.05
0.00
S&P 500 Bloomberg S&P GSCI Gold BBgBarc US Agg 10 Yr Breakeven
Commodity Bond Inflation
Data Source: Truist IAG, Morningstar; Past performance does not guarantee future results.How has bitcoin performed during market drawdowns?
In January 2016, when its market cap was just $6 billion dollars, bitcoin would not have
qualified as a company for inclusion in the S&P 500 Index by today’s standards. Using the
same investable proxies from above, we identified 12 occasions where the S&P 500
experienced 5% or greater drawdowns.
For the dates shown, gold and bonds served as the best hedges against stock declines, each
generating positive returns. Commodities offered minimal downside protection. Bitcoin was a
clear underperformer during times of market stress and actually amplified risk rather
than reducing it. During last year’s 33-day bear market at the onset of the COVID-19
pandemic the S&P 500 declined by 34%, however bitcoin declined by over 45% although both
quickly recovered. On a standalone basis, GBTC lost over 50% of its value a couple of times
since its launch in 2015 and experienced a 90% drawdown between December 2017 and
February 2019.
Bitcoin’s volatile performance prompted us to examine its daily behavior over rolling 30-day
periods in addition to monthly time-periods to better assess its immediate interaction with
stocks during times of elevated stress. The following chart shows bitcoin’s correlation with the
S&P 500 during periods, in the shaded regions, when the S&P 500 was experiencing a 5% or
greater correction. Just when stocks needed ballast to reduce portfolio risk, bitcoin
actually increased portfolio risk in most instances.
12 S&P 500 drawdowns of 5% or more since 12/31/2015
iShares
Grayscale iShares Invesco SPDR Core
# Bitcoin S&P Commodity Gold U.S.
START END
Days Trust 500 Tracking ETF Agg.
(GBTC) (IVV) (DBC) (GLD) Bond
(AGG)
1/5/2016 2/11/2016 37 -33.7% -9.2% -6.2% 15.4% 2.1%
6/8/2016 6/27/2016 19 21.0% -5.6% -3.9% 5.1% 0.9%
1/26/2018 2/8/2018 13 -22.9% -10.1% -5.1% -2.4% -1.1%
3/9/2018 4/2/2018 24 -25.3% -7.3% 0.5% 1.4% 0.7%
9/20/2018 10/29/2018 39 -15.6% -9.8% -1.0% 1.8% -0.3%
12/3/2018 12/24/2018 21 0.8% -15.6% -6.8% 3.1% 1.2%
5/3/2019 6/3/2019 31 47.0% -6.6% -5.0% 3.7% 2.1%
7/26/2019 8/14/2019 19 -1.7% -6.0% -3.5% 6.8% 2.1%
2/19/2020 3/23/2020 33 -45.2% -33.9% -25.7% -3.6% -1.3%
6/8/2020 6/26/2020 18 -16.2% -6.8% -1.6% 4.3% 0.8%
9/2/2020 9/23/2020 21 -19.6% -9.5% -3.7% -4.3% -0.5%
10/12/2020 10/30/2020 18 21.4% -7.4% -4.2% -2.4% -0.6%
Average Drawdown 24 -7.5% -10.6% -5.5% 2.4% 0.5%
Median Drawdown 21 -15.9% -8.3% -4.0% 2.4% 0.8%
Data Source: Truist IAG, FactSet; Past Performance does not guarantee future results.
Correlation is a statistical measure of how two securities move in relation to each other. With a range of +1 to -
1, positively correlated assets move in the same direction whereas negatively correlated assets move in
opposite directions.iShares S&P 500 ETF (IVV) and Grayscale Bitcoin Trust (GBTC)
correlations have risen during S&P 500 drawdowns
S&P 500 Declines greater than 5% S&P 500/Bitcoin Rolling 30 Day Correlations
0.50
0.00
-0.50
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Mar-16
Jun-16
Mar-17
Jun-17
Mar-18
Jun-18
Mar-19
Jun-19
Mar-20
Jun-20
Mar-21
Sep-16
Sep-17
Sep-18
Sep-19
Sep-20
Data Source: Truist IAG, FactSet; Past Performance does not guarantee future results.
Correlation is a statistical measure of how two securities move in relation to each other. With a range of +1 to -
1, positively correlated assets move in the same direction whereas negatively correlated assets move in
opposite directions.
Future risks and opportunities
Regulation: To set the stage, Treasury Secretary Janet Yellen and Fed Chair Jerome Powell
have both expressed their concerns about cryptocurrencies in recent speeches. Secretary
Yellen referred to cryptocurrencies as “a highly speculative asset” while recently, Chairman
Powell referred to them as “vehicles for speculation.” Regulatory concerns center around the
potential for using cryptocurrencies for illegal activities. In addition, as major economies such
as China, Europe and the U.S. advance initiatives around Central Bank Digital Currencies
(CBDC’s), any impact to bitcoin and other cryptocurrencies remains uncertain.
Speculation about the substance of future regulatory oversight, and who the governing
authority would be, continues to circulate. In fact, over the April 17th weekend, unconfirmed
reports of heightened interest from regulators briefly sent bitcoin prices down by almost 20%.
Regulatory risk for bitcoin is potentially meaningful. Though cryptocurrencies are likely here to
stay, the playing field may become more uncertain as the potential for regulatory involvement
remains fluid.
Opportunities: It is important not to define blockchain technology by bitcoin alone. As stated
earlier, Bitcoin is a well known subset of a much broader blockchain conversation. Lines can
easily be blurred between the prudence of including bitcoin as an investment in a fiduciary
portfolio and the positive impact that blockchain technology applications have in enhancing
legacy manufacturing and financial service processes for greater efficiency.
Bottom line
Bitcoin and other cryptocurrencies will continue to draw attention from investors and
regulators alike. The appeal of any asset that has generated extraordinary returns, like bitcoin,
and the fear-of-missing-out (FOMO) trade is understandable, but without a relationship to
fundamental economic drivers to support valuations, such a speculative investment lacks
merit in a prudently managed portfolio at this time. While this is a rapidly developing topic and
the future may provide better clarity, bitcoin and other cryptocurrencies are not a part of our
current investment universe or asset allocation process at this time. We’ll continue to monitor
the industry as it evolves and keep an open mind, but at this point, we recommend investors
not invest any money in cryptocurrencies that they can’t afford to lose.Disclosures
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Truist Wealth is a marketing name used by Truist Financial Corporation. securities, options, rights, or warrants mentioned or discussed in this material.
Services offered by the following affiliates of Truist Financial Corporation:
Banking products and services, including loans and deposit accounts, are Asset classes are represented by the following indexes. An investment cannot
provided by SunTrust Bank and Branch Banking and Trust Company, both be made directly into an index.
now Truist Bank, Member FDIC. Trust and investment management services S&P 500 Index is comprised of 500 widely-held securities considered to be
are provided by SunTrust Bank and Branch Banking and Trust Company, both representative of the stock market in general
now Truist Bank, and SunTrust Delaware Trust Company. Securities,
brokerage accounts and /or insurance (including annuities) are offered by Bitcoin is represented by the Grayscale Bitcoin Trust ("GBTC") and the CMBI
Truist Investment Services, Inc. (d/b/a SunTrust Investment Services, Inc.), Bitcoin Index
and P.J. Robb Variable Corp., which are each SEC registered broker-dealers,
Grayscale Bitcoin Trust ("GBTC") represents an indirect investment to bitcoin.
members FINRA, SIPC, and a licensed insurance agency where applicable.
It is an investment vehicle that enables investors to gain access and exposure
Life insurance products are offered through Truist Life Insurance Services, a
to bitcoin in the form of a security. Shares are distributed through sales in
division of Crump Life Insurance Services, Inc., AR license #100103477, a
private placement transactions and become eligible to sell into the public
wholly owned subsidiary of Truist Insurance Holdings, Inc. Investment
market after a statutory six-month holding period. Aside from the high volatility,
advisory services are offered by Truist Advisory Services, Inc. (d/b/a SunTrust
the investment vehicle carries additional risks due to the nature of its structure;
Advisory Services, Inc.), GFO Advisory Services, LLC, Sterling Capital
for example it may trade at a discount or premium to its net asset value.
Management, LLC, and Precept Advisory Group, LLC, each SEC registered
investment advisers. Sterling Capital Funds are advised by Sterling Capital The Coin Metrics Bletchley Index (CMBI) Bitcoin is an institutionally designed
Management, LLC. cryptoasset benchmark that represents a market aggregate USD value for
bitcoin.
While this information is believed to be accurate, Truist Financial Corporation,
including its affiliates, does not guarantee the accuracy, completeness or Commodities are represented by Invesco DB Commodity Index Tracking
timeliness of, or otherwise endorse these analyses or market data. Revise (Fund) (DBC) and the Bloomberg Commodity Index
The opinions and information contained herein have been obtained or derived The Bloomberg Commodity Index is a broadly diversified commodity price
from sources believed to be reliable, but Truist Financial Corporation makes index. The index tracks prices of futures contracts on physical commodities on
no representation or guarantee as to their timeliness, accuracy or the commodity markets. The index is designed to minimize concentration in
completeness or for their fitness for any particular purpose. The information any one commodity or sector. It currently has 23 commodity futures in six
contained herein does not purport to be a complete analysis of any security, sectors.
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changes in the level of the DBIQ Optimum Yield Diversified Commodity Index
Opinions and information expressed herein are subject to change without Excess Return™ (DBIQ Opt Yield Diversified Comm Index ER or Index) plus
notice. TIS and/or its affiliates, including your Advisor, may have issued the interest income from the Fund's holdings of primarily US Treasury
materials that are inconsistent with or may reach different conclusions than securities and money market income less the Fund's expenses. The Index is a
those represented in this commentary, and all opinions and information are rules-based index composed of futures contracts on 14 of the most heavily
believed to be reflective of judgments and opinions as of the date that material traded and important physical commodities in the world.
was originally published. TIS is under no obligation to ensure that other
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Comments regarding tax implications are informational only. Truist and its S&P GSCI Gold tracks the COMEX gold future and typically reflects Gold spot
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performance.
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