Should crypto be included in a diversified investment portfolio?

The cryptocurrency market has undergone significant professionalization in recent years, garnering serious attention from private and institutional investors. However, not everyone is fully convinced yet. In a recent roundtable session by Financial Investigator, various investment experts discussed whether crypto should be a permanent part of a diversified investment portfolio. I'll reveal the conclusion upfront: ignoring it is no longer an option.

Diversification Benefits

One of the main arguments for including crypto in an investment portfolio is diversification. Koen Bender (Mercurius Asset Management) emphasizes that the correlation between crypto and traditional assets such as stocks and bonds is relatively low. "This makes it attractive for investors looking for ways to diversify their portfolio and spread their risks," he adds.

One of the main factors making institutional investors hesitant is the volatility of the crypto market, according to Menno Martens (VanEck). This volatility makes it difficult for institutional investors to include crypto in their portfolios, especially if they are responsible for managing large sums of money.

Marcel Burger from Amdax states that there are sufficient ways to manage the risks of crypto. "Ideally, you see negative correlations with other asset classes, but the lack of correlation, as we see now, also leads to a better diversified portfolio. In this way, the entire investment portfolio gets an improvement in risk-return characteristics."

Burger adds that adding Bitcoin and Ether to a classic 60-40 portfolio can lead to higher returns without significantly increasing volatility, provided the right balance is maintained. He refers to recent reports from BlackRock that support this idea.

The argument about the lack of liquidity has also been dismissed now that institutional parties have been much more engaged with impact investing lately. This means that institutional parties now seem more willing to seriously consider crypto assets.

Institutional Adoption

There is increasing interest in crypto among institutional parties, which is emphasized by everyone. However, there is still hesitation due to volatility and previous excesses in the market, according to Burger. Where do we stand regarding the adoption of crypto by institutional investors, when will it be considered a full-fledged investment category alongside traditional investments such as stocks, bonds, or real estate?

Bender speaks of a game-changer, pointing to the entry of major players like BlackRock and Fidelity with their crypto ETFs. "The fact that these institutions are now offering ETFs based on cryptocurrencies means that crypto is increasingly being accepted as a serious investment category. This will likely encourage other institutional investors to take the plunge as well," Bender states.

Burger notes that institutional parties have their own pace. "They move a bit slower than family offices, but they will also take the step," says Burger. According to him, a slow but steady shift is taking place, with investors showing increasing interest in crypto as a means of diversification within their portfolios.

Regulation and Trust

Clear regulation is necessary to gain the trust of institutional investors. Institutional investors are looking for certainty and protection. Joost Elsenburg (HVG Law) emphasizes that the European Union's MiCA regulation is a positive development that contributes to market confidence. "This is an important step forward for the sector. It gives investors more certainty that they are protected against fraud and clear guidelines for how companies in the crypto market should operate. It will take time to fully implement the regulation and ensure that investors enjoy sufficient protection," says Elsenburg.

"Regulation can help to professionalize the market and ensure that investors feel protected against fraud and abuse," says Burger. He also points out the risks: "At the same time, we must ensure that regulations do not hinder innovation."

Ignoring is No Longer an Option

What is the most important message for the sector right now? Jeroen Tielman (Theta Capital) states that it is irresponsible for institutional investors not to seriously investigate the development of blockchain technology.

"Even if you are skeptical about the ideology behind Bitcoin and Ethereum, it is important to seriously consider crypto from a risk management and portfolio management perspective," says Tielman. "The train has left the station. We don't know exactly how this technology will develop, but it's clear that the potential impact can be significant. It is the responsibility of fiduciary managers to take this seriously and not wait until it's too late."