Bitcoin and the other major digital currencies have certainly taken the financial world by surprise, and have been snapped up by private investors and developers, as well as by small and medium enterprises, looking to shore up their cashflow with the generally high returns many altcoins seem to offer at this moment in time.
However, despite Bitcoin alone increasing in volume by an unprecedented 1400% last year, respected asset management company Sanford C. Bernstein Ltd believes that even this is not enough to encourage institutional investors to become involved.
Bernstein’s head of European equity and global quantitative strategy, Inigo Fraser-Jenkins, recently stated that Bitcoin has yet to develop a significant role within the world of asset allocation, citing that its liquidity and volatility make it too much of a risk at present, in spite of its impressive performance in the financial sector.
The environmental impact of cryptocurrency is also a concern, with the energy consumption demanded for the mining of Bitcoin and other digital currency being substantial, and liable to increase as mining becomes more difficult. Such considerations are vital for any environmentally-conscious institution investor.
Comparing the correlations, volatility and returns generated by Bitcoin against existing assets such as commodities, high-yield debt, emerging markets, and the ever-popular U.S. S&P 500 Index, over the last 24 months, the brokerage firm concluded that Bitcoin would have to post a 5% return on investment every month in order for optimised portfolios to justify allocating their finances to the currency in any meaningful way.
Even with the other risks being taken out of the equation, Fraser-Jenkins believes this to be too high a hurdle for Bitcoin to surpass at present.
If one does take the issues with regulation and liquidity into consideration, it automatically disqualifies Bitcoin for use in many pension funds.
So, for the time being at least, cryptocurrency must remain the preserve of smaller enterprises, with government and big business holding fire until the altcoin industry can show regular and sustainable growth.
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