Analysts from the finance house have made a broad statement on hedging investments to investor portfolios. According to a recent note made by the team of financial analysts representing JP Morgan, Bitcoin's current status functions as an uncorrelated hedge to the broader market.
“In a multi-asset portfolio, investors can likely add up to 1% of their allocation to cryptocurrencies in order to achieve any efficiency gain in the overall risk-adjusted returns of the portfolio,” stated the analysts, a team which included Joyce Chang and Amy Ho.
Having risen at least five times in the past year, Bitcoin's continued rise has prompted prominent investors such as Elon Musk, Paul Tudor Jones, and Stan Druckenmiller have bought in for their share. Companies like MicroStrategy and BNY Mellon have disclosed their Bitcoin positions. The average number of active users of cryptocurrencies, in general, has also risen significantly since December of 2020, adding some 15 million more users overall.
The alpha cryptocurrency has been touted by strategists as a viable means of hedging against significant fluctuations usually observed in charts for traditional asset classes. The recommendation of a 1% allocation for crypto is based on observations of crypto's—in particular Bitcoin's—highly volatile market, such that, in the event of a sudden move to a bearish turn, the effect would be insubstantial to an investor's current portfolio. While JP Morgan still sees Bitcoin as an off-risk asset like gold, correlative value of the cryptocurrency currently expresses 0.134 when compared to the S&P 500.
“Through the insatiable buy-side pressure from exchange-traded fund issuers, close-ended funds and large public corporations adding Bitcoin to their positions, demand is massively outstripping supply,” said Annabelle Huang, partner at Amber Group.
Notably, during the March 2020 market crash as the onset of the COVID-19 pandemic came to a fore, the cryptocurrency markets alongside Bitcoin also suffered the same, with a sharp bearish turn bringing BTC prices to a closure of as low as $5,000 in mid-March of 2020. The correlation rose to 0.54 during this period, suggesting that the two markets, while nominally unrelated, are correlated to a certain degree given that investments often overlap across portfolios.
Despite these positive statements, the analysts from JP Morgan remains doubtful of cryptocurrencies' usefulness in general, opining that “[cryptos] are investment vehicles and not funding currencies,” such that when investors are off "looking to hedge a macro event with a currency, we recommend a hedge through funding currencies like the yen or U.S. dollar instead.”
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.