logo_without_fields_edited.png

Why Should Digital Assets Be An Asset Class?

“It’s not every day, or even every decade, that an entirely new asset class is born. Yet, through a combination of computer science, cryptography, economics, and network theory, digital assets have arrived and are proving that they are an asset class unlike any other. "

– Matt Beck, Grayscale Investments

When deciding whether to add a new asset/security to one’s portfolio, the optimal risk/return ratio can be found on the efficient frontier.

Digital assets may represent the “missing piece” in asset allocation

  • Optimal beta portfolio may lie higher on the efficient frontier than previously thought

  • Present a new investment opportunity uncorrelated to other asset classes

  • Represent an asset class to which investors are generally under-allocated


Source: “A New Frontier: How Digital Assets are Reshaping Asset Allocation.” Matt Beck, June 2018



Why Invest in Cryptocurrencies?


Store of value characteristics:

Similar to real assets such as gold, digital assets like bitcoin exhibit store of value properties and other characteristics of sound money. These include durability, scarcity, divisibility, portability, fungibility, verifiability and recognizability.


Spending characteristics:

Similar to cash, digital currencies like bitcoin can be spent on goods and services, with over 100,000 merchants worldwide accepting them, including PayPal and Microsoft.


Growth characteristics:

As real applications for blockchain technology and digital assets continue to grow, digital assets have the potential to provide wealth preservation and accumulation concurrently.


Low correlation with other markets:

Most cryptocurrencies exhibit a low correlation to traditional assets. In fact, Figure 1 suggests that the average correlation with traditional asset classes and currencies is 0.11. The maximum correlation is 0.44 and the minimum is -0.24.


Therefore, as an asset class, cryptocurrency can potentially provide uncorrelated returns to investors.


Figure 1. Multi-Asset Correlation Matrix

December 31, 2016 through October 31, 2018, Based on rolling one-month returns


Hypothetical Simulated Portfolio Risk & Return


While digital assets may not be appropriate for all investors based on their investment mandate or risk profile, opportunistic investors may benefit by adding a 50 - 300 basis point digital asset allocation to their portfolio. A hypothetical simulated portfolio’s risk-return attribution after adding a digital asset allocation is illustrated.

Direct investments in cryptocurrency:

Buying digital currency directly may be suitable for investors with significant technological expertise and knowledge of the cryptocurrency landscape, who can determine how to buy, transfer and safeguard assets. However, for most traditional investors, the logistical complications associated with sourcing digital assets and finding and vetting service providers proves to be too challenging to be a safe or economically viable option.


Investing in a digital asset management fund:

Investing in a digital asset management fund may be the safest and easiest way to make investments in digital assets. Such an investment eliminates the challenges associated with buying, storing, and safekeeping these assets, offering seamless exposure.


Investment considerations

  • The process of purchasing cryptocurrencies is still complicated compared to buying traditional equities. If one wants to buy and trade cryptocurrencies directly, one needs to find a registered exchange which offers the particular digital asset, and complete an extensive verification process. Getting diversified digital asset exposure by buying multiple cryptocurrencies may require trading on multiple exchanges simultaneously. Investing through a diversified fund can mitigate the hassle of trading and managing accounts across multiple exchanges.

  • Digital assets are bearer assets. Holding a digital asset directly involves the cost of safeguarding the asset, and custodial solutions can be expensive, and difficult to manage from the technological perspective. Having a reliable fund manager with domain expertise cuts down these costs, and removes the burden of self-custodying these assets, which have no recourse if access is lost.

  • Digital assets are considered relatively high risk investments, and should be evaluated as an appropriately sized component of a diversified portfolio. ​


Special Thanks to Our Contributor

Established in 2013 by Digital Currency Group, Grayscale is a leader in digital currency investing. Grayscale provides secure access and diversified exposure to the digital currency asset class.


Grayscale Investments offers nine private placement products, which allow institutions and accredited investors to access individual digital currencies through the form of a security (Bitcoin, Bitcoin Cash, Ethereum, Ethereum Classic, XRP, Litecoin, Zcash, Zen). Grayscale also offers a diversified index fund, Digital Large Cap Fund, which provides exposure to the top digital assets based on a rules-based portfolio management process, which is reevaluated quarterly.


Rayhaneh Sharif-Askary

Director, Sales & Business Development

Grayscale Investments, LLC


P: +1 212.668.6687

E: Ray@grayscale.co

W: grayscale.co


Important Disclaimers
This article (the “Article”) is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase any investment or any securities. This Article does not constitute investment advice and is not intended to be relied upon as the basis for an investment decision, and is not, and should not be assumed to be, complete. Readers should make their own investigations and evaluations of the information contained herein. The information contained herein does not take into account the particular investment objectives or financial circumstances of any specific person or entity who may receive it. Each reader should consult its own attorney, business adviser and tax adviser as to legal, business, tax and related matters concerning the information contained herein.  Except where otherwise indicated herein, the information provided herein is based on matters as they exist as of the date of preparation and not as of any future date and will not be updated or otherwise revised to reflect information that subsequently becomes available, or circumstances existing or changes occurring after the date of preparation. Certain information contained in this Article constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,”  “target,” “project,” “estimate,” “intend,” “continue” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking statements. Readers should not rely on these forward-looking statements.  Certain information reflects subjective determinations which may prove to be incorrect. There can be no assurance that the estimates or projections will be accurate or that historical trends will continue. In considering the prior performance information contained herein, readers should bear in mind past performance is not necessarily indicative of future results. All rights reserved. The material may not be reproduced or distributed, in whole or in part, without the prior written permission of PrimeAlpha LLC. 

Copyright © 2020, PrimeAlpha, LLC