November 8, 2020 By Noelle Acheson Director of Research If you were forwarded this newsletter and would like to receive it, sign up here. PRICES (11/08/20 @ 12 p.m. UTC): BTC - $15,282.20 | ETH - $446.63
Hi all,
- Noelle
PS. The song this week is from the iconic film "Risky Business" (those shades!), and winks at the beauty of traditions (unless they have the potential to hurt savers, then they're not at all lovable – see THE BRIEFING).
PPS. Our October Monthly Review is out! it covers asset performance in October, Bitcoin's congestion problem and Ethereum's shifting metrics as the launch of Ethereum 2.0 looms. Download the free report here.
CoinDesk's upcoming virtual event Bitcoin for Advisors, on two half days Nov. 9-10, showcases a program tailored to the financial advisor community that covers investment theses for bitcoin, why younger demographics are turning to this asset and how it fits into the current global macroeconomic picture.
We will also walk through the practicalities: how to answer client questions about bitcoin, how to talk to your compliance department about bitcoin, how can bitcoin can help grow your book. Apply for Bitcoin for Advisors, Nov. 9-10.
The Briefing Portfolio Allocations: The Need for a New Type of Hedge
Of all of the many clever things Mark Twain is alleged to have said, one of my favorites, especially these days, is: "It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so."
In the turmoil that is 2020, many market "truths" have morphed into myths. And many trusted investment adages no longer make sense.
One that continues to puzzle me is how many financial advisers still recommend the 60/40 portfolio balance between equities and bonds. Equities will give you growth, the theory goes. And bonds will give you income as well as provide a buffer in times of equity decline. If you want to preserve capital into your old age, we're told, this is the diversification strategy for you.
That doesn't hold any more.
Diversification itself is not on trial here. Whether you subscribe to chaos theory or just enjoy a balanced diet, diversification is a pretty good rule of thumb when it comes to a healthy lifestyle (except perhaps when it comes to marriage).
It's the why of diversification when it comes to investments that we need to think about.
Why diversify?
The idea is that diversification spreads risk. What hurts one asset might benefit another, or at least not hurt it quite so much. An asset could have unique value drivers that set its performance apart. And a position in low-risk, highly liquid products allows investors to cover contingencies and to take advantage of other investment opportunities when they arise.
All that still largely holds. What needs to be questioned are the assumptions that diversification should be spread between equities and bonds.
One of the main reasons for the equity/bonds allocation split is the need to hedge. Traditionally, equities and bonds move inversely. In an economic slump, central banks would lower interest rates to reanimate the economy. This would push up bond prices, which would partially offset the slump in equities, delivering a performance superior to that of an unbalanced fund.
Since the crisis of 2008, that relationship has broken down. In fact, as the chart below shows, equities (represented by the S&P 500) have outperformed balanced funds (represented by the Vanguard Balanced Index) in terms of rolling annual performance over the past 20 years. Why? First, central banks no longer have interest rates in their recession-fighting toolbox. While negative rates are possible, they are unlikely to reanimate the economy enough to turn around a stock market falling on recession expectations.
You might have heard this before: Government bonds used to provide risk-free interest. Now they provide interest-free risk.
So, the justification of the 60/40 equity/bond split no longer has a meaningful argument to stand on, either as an income provider or as a hedge. Even just adjusting the ratio is missing the point. The underlying vulnerabilities for stocks and bonds now overlap.
(Note: We use Bitcoin with uppercase when talking about the network, and bitcoin with lowercase, or BTC, when referring to the asset.)
Approaching adulthood
Genesis (owned by DCG, also the parent of CoinDesk) has issued its Digital Asset Market Report for Q3, which shows a strong growth in lending and trading volumes, and highlights an interesting industry shift.
Anyone know what's going on yet?
This week will no doubt go down in history as one of the more surreal when it comes to events driving markets.
First, Tuesday was the longest day I can remember. In fact, at time of writing, it feels like Tuesday isn't over yet.
Second, stocks seem to love uncertainty. Who knew.
Third, the bitcoin price is defying gravity at a particularly confusing time, adding election outcomes and political uncertainty to the potential narratives that the market loves to grasp at. Bitcoin's performance this week has cemented its position in the pantheon of stellar outperformers of the year. The S&P 500 is putting on a good show though – note how its spurt in November accounts for most of its positive performance so far this year.
(Note: Nothing in this newsletter is investment advice. The author owns some bitcoin and ether.)
SPONSORED BY CRYPTO.COM The Crypto.com Exchange is a rapidly growing trading venue with a strong retail flow. Top institutions receive a credit line and highly competitive maker/taker fees. Our platform is robust, secure and compliant. Trade profitably on the Crypto.com Exchange – to get in touch with our institutional sales team visit bit.ly/cryptocomcoindesk now.
Chain Links Veteran investor Bill Miller, the chief investment officer of Miller Value Partners, revealed in an interview on CNBC this week that his MVP1 hedge fund had half of its investments in bitcoin. TAKEAWAY: Yet another respected name cites inflation concerns as one of the reasons professional investors should be looking at bitcoin. Another factor can be seen in Miller's statement that the risks of bitcoin going to zero are "lower than they've ever been before." He's talking about asymmetric risk: the probability that bitcoin will go to $0 (a loss of 100%) is much less than the probability it will provide a return of 200% or more.
As if proof were needed that this bitcoin rally is very different from the last one in 2017, the last time the BTC price was above $15,000, Google searches for "bitcoin" were also soaring. TAKEAWAY: This implies that the hype this time around is more muted (in spite of the hubris on Crypto Twitter). It also suggests that fewer "newbies" are coming into the market – the buyers that are pushing the price of bitcoin up don't need to Google it, which means that they're not attracted just by the performance. Square reported $1.63 billion of revenue and $32 million of gross profit from the Cash App bitcoin service in 2020 Q3, according to an investor letter published this week. This is a growth of up approximately 1,000% and 1,400% year-on-year, respectively. TAKEAWAY: Sales of bitcoin in Cash App earn Square a little under 2% in profit, which is a very thin margin compared to Square's overall business, which runs at much higher margins. But the strong growth indicates a substantial increase in retail demand for bitcoin, which could in part explain the growth in BTC addresses and, of course, the price momentum. Fidelity Digital Assets (FDA) is hiring over 20 engineers. In a post, the company said it was working on improving existing bitcoin custody and execution services, and building new products. TAKEAWAY: This hiring push hints at expansion plans for their digital asset services, which, given the reach of FDA's platform, could broaden the onramp for institutional investors.
We published a special series of articles and op-eds related to our Bitcoin for Advisors event on Nov. 9-10, all of which are worth a read:
This newsletter has not focused much on ether (ETH), the native token of the Ethereum blockchain, since it lags bitcoin in terms of market cap, liquidity, derivatives and number of onramps. Its infrastructure is maturing, though, and it is undergoing significant technological changes that will impact its value proposition. What's more, it could act as a good diversifier for a crypto asset allocation in portfolios. So far this year, it has significantly outperformed bitcoin (220% vs 117%).
Miners' income from processing transactions on the Ethereum blockchain more than halved in October as the mania for decentralized finance cooled and transaction fees fell by over 60%. TAKEAWAY: This drop in fees may not be such good news for the miners, but it is good for the Ethereum network, as it indicates that congestion is receding. We covered this and other congestion indicators in our Monthly Review, October 2020, which you can download for free here
CoinDesk Research's latest Monthly Review covers asset performance in October, Bitcoin's congestion problem and Ethereum's shifting metrics as the launch of Ethereum 2.0 looms. Download the free report.
Podcast episodes worth listening to:
In this 30-minute webinar, the first of the four-part series How to Value Ethereum, CoinDesk Research looks at accounts - a concept that sounds familiar to blockchain addresses, but involves novelties and complexities that are critical to understanding how Ethereum works.
Research Hub: New + Noteworthy
ATTENTION: Scammers have been sending fraudulent emails with links to sites disguised to look like coindesk.com. If you are in doubt about a link, type https://www.coindesk.com directly into your browser; do not copy and paste. Remember, if something seems too good to be true, it probably is.
Copyright © 2020 CoinDesk, All rights reserved.
250 Park Avenue South New York, NY 10003, USA You can manage your preferences here or unsubscribe from all CoinDesk email. |
Donations
BTC: bc1qxv3stg0xha9upurf7h4aqnmg3xjn3h0zk28kpe
ETH: 0x01870296774Fb0A2DbF9b44d2E6a57fb8Ccea070
LTC: LQ44CP6xDDkX5bAiKd3yqmDB4c23U7orrQ
DOGE: DCpu9v1bkTXj8VKUDG97LHdV2qipDPyZsR
ADA: addr1qx4q7348dv2ju5zshee9ru23ssmqhyyjlnxe0xlezjq5we42par2w6c49eg9p0nj28c4rppkpwgf9lxdj7dlj9ypganqtmuu2p
domingo, 8 de novembro de 2020
Assinar:
Postar comentários (Atom)
Donations
BTC: bc1qxv3stg0xha9upurf7h4aqnmg3xjn3h0zk28kpe
ETH: 0x01870296774Fb0A2DbF9b44d2E6a57fb8Ccea070
LTC: LQ44CP6xDDkX5bAiKd3yqmDB4c23U7orrQ
DOGE: DCpu9v1bkTXj8VKUDG97LHdV2qipDPyZsR
ADA: addr1qx4q7348dv2ju5zshee9ru23ssmqhyyjlnxe0xlezjq5we42par2w6c49eg9p0nj28c4rppkpwgf9lxdj7dlj9ypganqtmuu2p
Don’t put all your eggs in one basket