The approximately 1,643% return of Bitcoin in 2017 and its subsequent decline has driven strong interest among investors in cryptocurrency and its enabling technology, which is called either a distributed ledge or blockchain. Traditional asset managers, for the most part, have been tiptoeing around the topic. Broadly speaking, most firms have yet to embrace cryptocurrency, but some have said they believe blockchain technology has much promise.
Bitcoin, which is one of the most popular forms of cryptocurrency, rallied 1,643% in 2017, according to an article from the Motley Fool. The currency also rallied strongly in 2010 with a 9,567% return and in 2013 with a 5,993% return.
However, it has also had noteworthy declines, including during the early part of this year. As of late last week, Bitcoin was down 51% from its February high, despite having rallied recently, according to an article from TheStreet.com.
Bitcoin is a form of cryptocurrency that can be used as an alternative to cash. Cryptocurrency includes a distributed ledger, or blockchain, that contains a record of transactions. It is somewhat comparable to a dollar with a list of transactions written on it that shows everyone who has held the currency.
Blockchain technology is being embraced for a variety of applications. Eastman Kodak, for example, is developing distributed ledger technology that will let photographers license their photographs. Advertising agencies are also developing distributed ledgers to track the complex process of using automation to determine which digital ads should be pitched to specific individuals.
One appeal of distributed ledgers is that data miners validate entries in the recordkeeping systems in exchange for receiving cryptocurrencies.
Funds of cryptocurrency are currently available, but they are usually limited partnerships and are structured similar to hedge funds.
Among traditional assets managers that have published content on the topic, most firms are taking a cautious approach. In March, T. Rowe Price released a paper that said Portfolio Manager Henry Ellenbogen during the holiday season received more inquiries about cryptocurrency than about equities.
The currencies are too speculative for T. Rowe Price managers to hold in any of their strategies. The firm, however, is participating in a pilot program with Bankchain, which is a post-trade settlement platform powered by blockchain. T. Rowe maintains that the technology has potential to streamline the post-trade process, provide cost savings and operational efficiencies.
T. Rowe also believes that blockchain technology could also be useful in the medical industry because it could serve as a secure platform for storing patients' medical records.
Indexing king The Vanguard Group is also embracing blockchain technology, but is pessimistic regarding the outlook for the value of Bitcoin. Joe Davis, Vanguard’s chief economist, wrote earlier this year that there’s a real possibility that the value of Bitcoin could drop to zero. He maintains that the investment case for cryptocurrency is weak because digital currencies generate no cash flow.
He also cautions that blockchain networks may be heading for consolidation as new innovations may make certain programs obsolete. If networks collapse, the value of their accompanying currency could follow the pattern of tulip prices during the tulip mania bubble in 17th century Holland.
VanEck, which manages an index of cryptocurrencies, disagrees with the notion that cash flow is required for valuing an asset. In a paper on the topic (PDF), VanEck argues that modern art and precious metals produce no cash flow, but both have value.
Van Eck had previously filed with the SEC to create a cryptocurrency exchange traded fund. It withdrew the application last fall after the regulator said it would not consider applications for ETFs based on cryptocurrency derivatives.
VanEck’s paper also advises financial advisors to take a measured approach to helping clients with investing in cryptocurrency. For example, allocating more than 5% or 10% of a portfolio’s assets to cryptocurrency my not be appropriate. VanEck also believes that computing requirements for maintaining distributed ledgers are likely to support demand for semiconductors, which in turn could help technology companies grow their revenues and earnings.