Cryptocurrencies are an asset for alternative defensive portfolios as bond markets lose their potency, says Pendal Group head of bond, income and defensive strategies Vimal Gor.
Gor believes the government bonds have lost effectiveness as yields head lower and cryptocurrencies are a “smarter” investment in defensive portfolios because they moved outside the price setting medium that central banks control.
“We set up a volatility function about four to five years ago thinking about how we can protect and how we can manage a defensive side of a portfolio when bonds lose their efficacy,’’ Gor told Investment Magazine’s Fixed Income and Private Credit Forum in late March.
“The lower bond yields go, the less efficient they are of providing that defensive play off.”
Gor says bonds, particularly US Treasuries, remain the most liquid assets in the market until Bitcoin is possibly regulated and offers “pristine kinds of collateral.’’
“Bitcoin gained a lot of popularity at a time (Central Banks and governments) were fighting Covid and working out Covid responses so with hindsight they would’ve liked to have regulated this thing a year ago, or banned it, but they can’t now. It’s a trillion dollar asset,’’ Gor says.
“I’m 99.9 per cent sure they’ll regulate Bitcoin soon and that opens the floodgates to institutional investment. It’s a massive asymmetric payoff. It’s like an option premium on the increasing digitisation of the world.’’
Gor says central banks’ widespread quantitative had prolonged underlying problems for investors and had lost them some credibility.
“Quantitative easing is the central banks telling you they’re going to set the price for interest rates,’’ Gor says.
“Now what central banks are saying is they want to control the entire yield curve. Effectively what they’re telling you the central bank knows better than the private sector the price of credit and interest rates should be.
“If you lock those things, you limit your ability to make money out of that sector and you force money out of bonds into other assets.”
He argues institutional investors can no longer rely on government bonds and “a little bit of credit” as a defensive asset portfolio.
“You need to be thinking about numerous strategies, numerous asset classes and asset allocation between them, to get you that defensive part of the portfolio which you kind of used to take for granted for the last 20-30 years,’’ he says.
“If you hold bond yields down artificially or you set them at a level that is artificial, obviously it has impacts on every other asset from private equity, to VC to SPACs to real estate. Every asset is largely a derivative of the central bank implied number now.
“That’s why crypto is so much more interesting now because the amount of investable asset classes is falling. There are markets now which are slightly outside of the price setting mechanism that central banks’ control.
Gor says Pendal had been approaching defensive investment from an asset allocation viewpoint and building completion portfolios.
“We found crypto assets offer significant positive characteristics when you build a completion portfolio,’’ Gor says
“Government bonds still play a very valid role but crypto is getting more attention because it’s being viewed as digital gold,’’ Gor says.
“There are more than 7000 cryptocurrencies out there; one has a utility as a store of value and that’s Bitcoin but when you’re buying Ethereum, Polkadot, Cardano, you’re buying technology, you’re buying an adoption curve in technology.”
Grouping Bitcoin, an alternative to fiat currency, with other cryptocurrencies was “doing a disservice” to them as technology adoptions, he says.
“Having a broad based exposure to those is like having an idiosyncratic risk,’’ Gor says.