In its recent megatrends report, asset manager PGIM dismissed cryptocurrencies as viable investments for investor portfolios.
Throughout the course of the year, investors have raised questions about digital currencies in response to the decline in the value of Bitcoin and the total collapse of Terra’stablecoins’ in May.
The PGIM report went so far as to compare modern cryptocurrency to the ‘wildcat’ banking era of American history, when state financial institutions issued their own, frequently highly unstable currencies prior to the introduction of a federal currency in 1863.
“As long-term investors and fiduciaries on behalf of our clients, three things need to be true for us to add an asset class into a portfolio: the asset needs a clear regulatory framework, it needs to be an effective store of value, and it needs to have a predictable correlation with other asset classes,” says PGIM CEO David Hunt. “Cryptocurrency currently meets none of these three criteria. It’s much more of a speculation than an investment.”
The analysis conducted by PGIM demonstrates that bitcoin is an ineffective portfolio diversifier and an unsatisfactory safe-haven asset and inflation hedge. Recent risk-adjusted returns are comparable to those of other asset classes, but drawdowns are more frequent and larger. In addition, the unsteady regulatory environment and the major environmental, social, and governance problems provide formidable obstacles for long-term investment.
However, according to PGIM COO Taimur Hyat, investing in the future of the crypto business does not have to entail purchasing digital currencies.
Investors should concentrate their attention on companies that are contributing to the development of the infrastructure of the cryptocurrency business. These companies are sometimes referred to as the “picks and shovels” of the sector.
“There’s a bit of a misconception that if you believe in the crypto ecosystem, you have to invest in a cryptocurrency,” Hyat said on Bloomberg’s QuickTake Stock broadcast. “We do see value in some of the incidental innovation that’s happened in the creation of these currencies, where you don’t need to go into the currency itself. But you can invest in blockchain, particularly private-permission blockchains and all the infrastructure around them. You can invest in smart contracts and the companies using smart contracts.”
PGIM is the global investment management business of Prudential Financial, Inc. (PFI) USA, with USD 1.5 trillion in assets under management.
