The Banking Executive Magazine - May 2022 Issue

Cryptocurrencies and Blockchain Technology diversifiers, as inflation hedges or as growth assets (like tech stocks). In each case, we find the potential con- tributions of Cryptocurrencies. Therefore an investment in Bitcoin may best be compared to a call op- tion on its underlying Blockchain technology and that even modest al- locations should be approached with caution. Cryptocurrencies as diversifiers It is clear to date that Bitcoin has demonstrated very unstable correla- tions with stocks and bonds (Figure 4), making it a poor choice as a port- folio diversifier. Bitcoin and stocks and bonds have no correlations Nor has Bitcoin exhibited the char- acteristics of a safe haven asset. Like gold, Bitcoin is not issued or con- trolled by any entity, institution or government. That characteristic has allowed gold to serve as a safe haven during some periods of political and/or economic uncertainty. Ana- lysts suggest that Bitcoin’s price has not imitated gold’s and that Bitcoin has been far more volatile than gold or any other traditional assets (figure 5). ISSUE 161 MAY 2022 the BANKING EXECUTIVE 39 Moreover, when trying to assess the macroeconomic or market- related drivers of Cryptocurrencies’ Performance, we find that Bitcoin display a significant amount of idio- syncratic risk; this means that its per- formance has not been explained easily by that of other assets or macro-linked commodities (Figure 6). While idiosyncratic sources of re- turn can improve portfolios’ risk-re- turn profiles, the volatility of this cryptocurrency delivers the majority of the risk-return benefits. Bitcoin has displayed high idiosyncratic risk since its inception. CRYPTOCURRENCIES AS AN INFLATION HEDGE Bitcoin are limited in supply similar to gold, suggesting they may offer some degree of inflation protection. However, consider the relationship between Bitcoin’s price and two measures of expected future infla- tion: Although Bitcoin has briefly acted like gold (most notably around the Federal Reserve’s announcement in March 2020 of its plans to support the economy amid the pandemic, it has not exhibited the correlation with macro inflation expectations that in- vestors seek from an effective infla- tion hedge (Figure 7a and 7b). in other term Bitcoin has not yet proven its effectiveness as an inflation hedge.