The latest crypto collapse – in large part driven by poor design of so-called stablecoin UST – highlights why cryptocurrency is a poor choice for long-term investors, according to heavyweight investor PGIM.
The $1.4 trillion global investment management business of Prudential Financial, PGIM said dozens of its investment professionals across fixed income, equity, real estate, private debt and alternatives businesses have come to the conclusion that direct investment in cryptocurrencies offers little benefit to an institutional investor while adding considerable volatility and risk.
“As long-term investors and fiduciaries on behalf of our clients, three things need to be true for us to add an asset class into a portfolio: the asset needs a clear regulatory framework, it needs to be an effective store of value, and it needs to have a predictable correlation with other asset classes,” said PGIM CEO David Hunt.
“Cryptocurrency currently meets none of these three criteria. It’s much more of a speculation than an investment.”
PGIM’s latest ‘Megatrends’ research claims that cryptocurrency is an unreliable portfolio diversifier and an inadequate safe-haven asset or inflation hedge. It said recent risk-adjusted returns are not much different than other asset classes but with more frequent and greater drawdowns.
Furthermore, the unsettled regulatory backdrop and the significant environmental, social and governance concerns pose significant additional headwinds for long-term investors.
“Cryptocurrency may be a heroic quest to build a viable, decentralised peer-to-peer payment system, but its pricing is based on speculative behaviour, rather than a fundamental thesis around its value or utility,” said PGIM head of thematic research Shehriyar Antia.
“Furthermore, with little evidence to support it as an effective inflation hedge or safe-haven asset, we see no reason for cryptocurrencies to be a part of institutional portfolios.”
PGIM says cryptocurrency is not an effective hedge against inflation: in 2021, the price of Bitcoin and other cryptocurrencies moved with inflation only for a brief time before falling sharply, while gold has demonstrated since the 1970s that it can be an effective and reliable inflation hedge.
It added that Bitcoin does not function as a safe-haven asset: the most prevalent cryptocurrency was not a steadying force in early 2020 when global asset prices spiralled downward due to worldwide COVID-induced shutdowns. It held far less of its value than conventional safe-haven assets.
Cryptocurrencies also clash with ESG objectives, said PGIM, as a single transaction on the bitcoin blockchain is equivalent to 2 million transactions on the Visa network, or roughly the same energy needed to power the average American home for over two months.
“Cryptocurrency gets all the breathless hype, but it’s the underlying technology where we find the most interesting investment opportunities,” said Taimur Hyat, chief operating officer for PGIM.
“Firms that enable real-world blockchain applications like clearing and settling transactions, preventing fraud, and tokenising real assets offer significantly greater creation of value over the next decade. The old axiom applies – when there’s a gold rush, invest in shovels and pickaxes.”