Cryptocurrencies such as bitcoin have been turbulent. Prices have fallen sharply. Events reignite debate on whether these entities really can be anything other than a "play" asset for serious investors. One firm has even built a product with gold in it to reduce volatility. We explore developments.

Two years ago in the midst of the pandemic bitcoin traded at £7,521 ($9,260). A year later it fetched £33,188 and yesterday, it changed hands at £23,950. With recent choppy price action, many investors will only want cryptos to be a small part of any portfolio. But the passage of time suggests that these assets aren’t going away. 

Even so, the slide in recent weeks might dent confidence in cryptos as being effective at protecting wealth in times of high inflation. The jury is out. What should investors do?

“This volatility once more underscores our view that while historical correlations between digital assets and equities have been low on average, these tend to spike in times of risk-off, often resulting in outsized drawdowns for cryptos relative to equities in risk-off times. We therefore view cryptos primarily as return enhancers in a portfolio, rather than a safe-haven asset. For now, headwinds are likely to persist and a quick reversal is unlikely,” Sipho Arntzen, next generation research analyst, Julius Baer, said in a recent note. 

“Digital assets have undoubtedly benefited from the low interest rate, high liquidity environment in recent years, with the reversal of the trend likely to remain a strong top-down driver of the asset class going forward. This recent sell-off once more reinforces our view that digital assets behave very much like risky assets rather than safe-haven assets seeking to diversify a portfolio,” Arntzen continued.

“While historically correlations between digital assets and equities have been low on average, they tend to spike around risk-off events, often resulting in digital assets falling more than equities, as has been demonstrated recently by markets. For now, headwinds are likely to persist and a quick reversal is unlikely. Another development also weighing on cryptos is the recent incident where the stablecoin Terra USD (UST) lost its 1:1 peg to the US dollar,” the analyst said.

Fancy some gold with that?
This concern that bitcoin doesn’t cut it as an inflation hedge or portfolio protector is serious, but what happens if investors blend it with something that does boast such qualities, such as gold? UK-based ByteTree, an asset manager business, has helped to do just that. In April it celebrated the launch that month of the listing of the 21Shares ByteTree BOLD ETP on the SIX Swiss Exchange.

This was the world’s first exchange traded product that combines bitcoin and gold, its makers said. (ByteTree provides digital asset data, fundamentals, technicals and crypto research and analysis.)

Known as BOLD for short, the offering’s main gaol is to protect against inflation via risk-adjusted exposure to bitcoin and gold with assets weighted in inverse proportion to their risk. The index tracks a customised benchmark/index comprising bitcoin and gold, rebalanced once a month. The weighting at launch is 18.5 per cent bitcoin and 81.5 per cent gold. The less volatile asset gets the higher weighting, and these are adjusted to smooth and enhance combined returns over time.

Gold has historically performed well in “risk-off” economic environments, while bitcoin has performed well in “risk-on” economic environments, ByteTree argued in a note. 

“In a time of rising structural inflation and heightened geopolitical risk, we believe this can act as an important risk and return diversifier in a balanced portfolio,” Charlie Morris, CIO and founder of ByteTree, said. 

Adding gold to the menu might make bitcoin more digestible for skittish investors.

Over at UBS, the Swiss bank sounded a sceptical note today. 

“As the monetary regime that fueled the crypto rally unwinds, we think investors should avoid trying to call a bottom on these highly speculative assets. At present, we see more attractive options for portfolio hedges, such as via healthcare and commodity exposure, and also other ways to take on portfolio risk, such as by tilting equity allocations toward value and the energy sector, or via alternative assets," Mark Haefele, chief investment officer at UBS Global Wealth Management, said. 

Whatever doubts remain, it appears that innovation pushes ahead and cryptos push into mainstream financial areas.

Japanese banking group Nomura has entered the cryptos derivatives space, for example.

“Nomura has launched Bitcoin OTC derivatives with Bitcoin non-deliverable forwards and non-deliverable options for clients in Asia out of Singapore. We also have the capability to offer Bitcoin futures and options trading, with such trades executed this week on the CME with Cumberland DRW, marking the first digital asset trades for Nomura,” Rig Karkhanis, head of Global Markets, Asia ex-Japan, Nomura, said.

“Digital assets have come a long way in the past several years, with infrastructure growing to keep pace with investor interest. Working with institutional-grade counterparties will allow us to scale into the increasing demand from our clients. Options enable investors to trade volatility directly and protect against downside risks in the crypto market,” Karkhanis said.

He’s certainly right that investors will want to hedge volatility if they can, and others might be willing to shoulder it. Where different risk appetites exist, capitalism follows. Maybe what we are seeing is the maturation of a market figuring out new ways, or riffs on old tunes, in how to handle the ups and downs of a new field of commerce.

And maybe such tales remind us that gold isn’t going away as a portfolio toolkit, either.