Crypto for Advisors: Is Crypto Too Volatile?

Today’s
newsletter
marks
my
one-year
anniversary
of
curating
the
Crypto
for
Advisor
newsletter.
Time
flies
when
you
are
having
fun,
and
it’s
hard
to
believe
I
have
52
issues
under
my
belt.
Thanks
to
CoinDesk
and
particularly
Kim
Klemballa
for
giving
me
this
opportunity
along
with
all
of
our
valued
newsletter
contributors
who
spend
their
time
building
this
industry
as
your
contributions
are
invaluable.
As
we
continue
our
crypto
journey
together,
I
hope
to
see
new
contributors
and
continued
engagement
with
ideas
and
topics
as
we
strive
to
deliver
advisor
education
globally.
Your
educational
needs,
views
and
opinions
are
what
shape
this
newsletter
–
as
it
is
truly
Crypto
for
advisors!

We
understand
the
last
couple
of
years
have
been
challenging
in
the
crypto
space,
but
2024
has
brought
excitement
and
energy
back.
We
are
seeing
many
exciting
product
launches
and
regulatory
advancements.
I
look
forward
to
continuing
to
provide
content
to
our
valued
audience
and
to
keeping
them
informed
of
timely
and
relevant
developments.

In
today’s
issue,
André
Dragosch,
head
of
research
at
ETC
Group,
discusses
the
volatility
of
crypto
assets,
including
bitcoin
and
ether
and
how
they
compare
to
other
emerging
technology
investments.
Bryan
Courchesne,
CEO
of
DAIM,
explains
how
advisors
can
navigate
the
volatility
of
crypto
within
client
portfolios.

Happy
Independence
Day
to
our
American
readers.

–
Sarah
Morton

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Traditional
financial
investors
tend
to
shun
crypto
assets
because
of
the
high
volatility.

To
be
fair,
the
volatility
of
crypto
assets
is
relatively
high
compared
to
traditional
asset
classes
such
as
equities,
bonds
and
most
commodities.

Over
the
past
three
months,
the
annualized
volatility
of
bitcoin
and
ether
has
been
around
45%
to
50%,
respectively,
while
the
volatility
of
the
S&P
500
was
around
15%.

A
recent
survey
by
Fidelity
among
institutional
investors
also
identified
high
volatility
as
the
No.
1
most-cited
barrier
keeping
investors
from
allocating
to
crypto
assets.

However,
the
truth
is
that
high
returns
come
with
high
risks,
i.e.
volatility.

Put
differently,
where
there
is
growth,
there
is
volatility.

Most
equity
investors
know
this
since
most
high-growth
mega-cap
stocks
like
Tesla
still
tend
to
have
high
double-digit
volatility.

Will
tokenization
of
real-world
assets
(RWAs)
take
off,
and
will
Ethereum
be
the
go-to
platform?

Will
bitcoin
replace
the
U.S.
Dollar
as
a
global
reserve
currency?

Although
these
types
of
scenarios
have
become
increasingly
likely
over
the
past
few
years,
there
remains
uncertainty
around
these
questions.

Uncertainty
tends
to
create
volatility.

The
history
of
Amazon
holds
important
lessons
in
this
regard.
In
the
late
1990s,
most
Wall
Street
analysts
thought
“selling
books
online”
was
a
silly
idea.
There
was
a
lot
of
uncertainty
about
whether
online
retailing
and
the
internet
in
general
would
eventually
become
mainstream.

In
the
same
way
that
the
uncertainty
around
the
technology
has
declined,
the
volatility
in
Amazon’s
stock
price
has
declined
over
time.

Few
investors
seem
to
remember
that
Amazon’s
stock
used
to
record
above
300%
in
annualized
volatility
in
the
late
1990s;
today,
the
volatility
is
well
below
50%.

We
have
already
observed
a
similar
structural
decline
in
volatility
in
the
case
of
crypto
assets.

One
reason
is
that
bitcoin’s
scarcity
has
increased
with
every
halving,
making
it
more
“gold-like.”
Halvings
are
best
understood
as
a
supply
shock
that
reduces
the
supply
growth
of
bitcoins
by
half
(-50%).
Hence,
the
character
of
bitcoin
as
an
asset
class
has
changed
over
time

While
bitcoin’s
volatility
was
around
200%
during
the
first
epoch
–
the
roughly
four-year
timespan
between
the
cryptocurrency’s
pre-programmed
“halvings”
of
miner
rewards
–
until
2012,
it
has
decreased
to
only
45%
more
recently.
Similar
observations
can
be
made
regarding
ether.

In
a
global
60/40
stock-bond
portfolio,
the
maximum
Sharpe
Ratio
is
achieved
by
increasing
the
bitcoin
allocation
to
around
14%
at
the
expense
of
the
global
equity
weighting.

The
Sharpe
Ratio
of
major
crypto
assets
like
bitcoin
or
ether
is
significantly
above
1,
which
means
that
investors
are
more
than
compensated
for
exposing
themselves
to
higher
volatility.

Looking
ahead,
the
decline
in
volatility
is
bound
to
continue
with
every
new
halving.
The
next
one
is
scheduled
to
happen
in
2028.

Increasing
retail
and
institutional
adoption
of
this
technology
is
also
bound
to
decrease
volatility
structurally
over
time.

The
reason
is
that
increasing
heterogeneity
among
investors
will
lead
to
more
dissent
between
buyers
and
sellers,
which
dampens
volatility
–
the
essence
of
Edgar
Peters’s
Fractal
Market
Hypothesis.

Just
remember:
Where
there
is
growth,
there
is
volatility.

–


André
Dragosch,
head
of
research,
ETC
Group

Q.
How
can
advisors
help
their
clients
navigate
crypto
volatility?

A.
Crypto,
in
its
short
history,
has
undoubtedly
been
a
volatile
asset.
But
that
does
not
mean
that
it
should
be
ignored
by
advisors.
Advisors
should
not
consider
assets
in
isolation
but
rather
how
they
interact
with
others
in
a
well-balanced
portfolio.
When
creating
a
portfolio
that
can
deliver
long-term
results,
diversification
is
key.
Asset
prices
move
in
cycles,
sometimes
together
but
more
or
less
distinct.
This
can
be
measured
by
an
asset’s
correlation
to
other
assets.
A
lower
correlation
means
assets
are
less
likely
to
move
together.
If
one
asset
is
up
35%
in
the
year,
another
asset
might
only
be
up
4%.
If
assets
are
negatively
correlated,
one
asset
will
be
up
in
a
given
period
while
the
other
will
be
down.
This
is
important
in
the
context
of
an
investment
portfolio
because
while
assets
may
be
volatile
themselves,
including
them
with
other
less
correlated
assets
can
lower
the
overall
volatility
of
a
portfolio.

Q.
Is
there
a
correlation
between
crypto’s
volatility
and
other
assets?

A.
With
respect
to
correlation,
a
volatile
asset
like
crypto
is
actually
very
important
to
decrease
the
overall
volatility
of
a
portfolio.
Lowering
the
overall
volatility
of
a
portfolio
is
important
as
it
helps
smooth
investment
returns
over
time.
This
is
important
for
many
reasons.
For
example,
an
investor
could
have
significant
and
unpredictable
liquidity
needs.
If
they
have
a
portfolio
of
highly
correlated
assets
and
those
assets
are
experiencing
a
period
of
poor
returns,
they
would
be
withdrawing
a
larger
percentage
of
their
portfolio
compared
to
a
portfolio
that
included
less
correlated
assets.
Crypto,
having
a
low
correlation
with
traditional
assets,
could
help
in
this
regard.
Its
volatility
has
historically
been
positively
skewed
so
even
though
it
has
big
swings,
when
all
other
assets
are
down
it
can
provide
a
ballast
to
your
portfolio.
Smoothing
returns
also
helps
from
a
cognitive
perspective
for
most
investors.
People
can
get
too
emotional
when
looking
at
their
portfolio’s
performance.
Big
price
moves
have
a
visceral
effect
where
large
moves
up
make
people
want
to
buy
more
(usually
right
before
a
drop)
and
large
moves
down
make
people
discouraged
and
pull
money
out
(right
before
performance
rebounds).
Including
at
least
a
small
portion
of
(less-correlated)
crypto
in
a
portfolio
smooths
the
returns
of
a
portfolio
so
when
investors
check
in,
they
see
more
modest
gains
or
losses.
This
helps
keep
their
portfolio
out
of
sight
and
out
of
mind
which
generally
improves
the
chances
of
long-term
success.
Crypto,
while
volatile,
should
not
be
viewed
in
isolation
but
in
the
context
of
how
it
can
help
create
a
truly
diversified
portfolio
that
will
help
create
long-term
wealth
for
investors.

–
Bryan
Courchesne,
CEO,
DAIM

Note:
The
views
expressed
in
this
column
are
those
of
the
author
and
do
not
necessarily
reflect
those
of
CoinDesk,
Inc.
or
its
owners
and
affiliates.