In its megatrends study, asset management PGIM rejected cryptocurrency as a sensible investment for client portfolios.
Investors have expressed concerns about digital currencies throughout the year as a result of a decline in the value of Bitcoin, a venerable currency, and the total collapse of Terra “stablecoins” in May.
The PGIM analysis even went so far as to contrast contemporary cryptocurrencies with the so-called “wildcat” banking period in American history, when state financial institutions developed their own, frequently extremely unstable, currencies prior to the creation of a federal currency in 1863.
While cryptocurrencies have “heroic” goals, Shehriyar Antia, head of thematic research at PGIM, claimed that their pricing is based on speculative behavior and that they are a “inadequate safe haven asset or inflation hedge” and a “unreliable diversifier.”
Despite persistent skepticism surrounding cryptocurrencies, he claimed that several conventional financial institutions have recently made sizable investments in them.
PGIM continues to believe that cryptocurrency is still more of a speculative investment and is not yet fit for long-term investments or fiduciary institutional portfolios based on the facts.
According to Antia, risk-adjusted returns have not differed greatly from those of other asset classes, but with more frequent and severe drawdowns.
He claimed that in order for any asset class to be included in the client portfolios, the following three criteria must be met: the asset class must have a clear regulatory framework, be a reliable store of value, and have a foreseeable connection with other asset classes.
Currently, cryptocurrency does not fit any of these three requirements.
Antia continued by saying that there is no justification for cryptocurrencies to be included in institutional portfolios because of the uncertain regulatory landscape and the significant ESG concerns, which extend beyond governance to include concerns about the environment.
However, the PGIM analysis saw merit in the blockchain technology that underpins cryptocurrencies, claiming that it represented a very safe and reliable mechanism for validating and recording transactions.
Investors would be advised to concentrate on blockchain use cases with clearly defined practical applications that tackle current real-world issues, especially in the financial services industry, the research advises.
