Bitcoin (CRYPTO: BTC) is many things to many people.
Some folks make use of the world's number one crypto by market cap for everyday transactions, with more merchants in Australia beginning to accept digital assets as payment.
Other crypto investors buy Bitcoin planning to hold (or HODL) onto it for the long-term potential value gains.
And still other speculators engage in trading the token. Of course, they hope to buy near the low points of its big price swings and sell near the high.
But can Bitcoin play a role in a diversified ASX share portfolio?
The answer to that question will vary depending on who you ask.
Bitcoin gets the institutional investing thumbs down from PGIM
In its latest Megatrends Report, PGIM – the global investment management business of Prudential Financial Inc (NYSE: PRU) – pulled few punches when it comes to cryptos like Bitcoin.
According to the PGIM report, cryptos are not reliable assets to diversify investment portfolios. Nor do they offer an adequate safe haven in troubled times or act as an inflation hedge.
With the focus specifically on institutional investors, PGIM sees little benefit in directly investing in cryptos. It says that doing so adds plenty of risk and volatility.
According to PGIM CEO David Hunt, investing in an asset like Bitcoin is speculation, not investing:
As long-term investors and fiduciaries on behalf of our clients, three things need to be true for us to add an asset class into a portfolio: the asset needs a clear regulatory framework, it needs to be an effective store of value, and it needs to have a predictable correlation with other asset classes.
Cryptocurrency currently meets none of these three criteria. It's much more of a speculation than an investment.
PGIM head of thematic research Shehriyar Antia said that atop the speculative nature, cryptos have as yet failed to live up to their safe haven billing:
Cryptocurrency may be a heroic quest to build a viable, decentralised peer-to-peer payment system, but its pricing is based on speculative behaviour, rather than a fundamental thesis around its value or utility.
Furthermore, with little evidence to support it as an effective inflation hedge or safe-haven asset, we see no reason for cryptocurrencies to be a part of institutional portfolios.
Don't overlook the massive energy use
Then there are the environmental, social and governance issues (ESG) surrounding Bitcoin.
As we've previously reported, globally some cryptos use as much energy as the entire population of the Netherlands.
PGIM agrees that cryptos clash with ESG objectives. Its report narrows that down, saying that a single transaction on the Bitcoin blockchain uses as much energy as two million Visa transactions. That's about equivalent to the power used by the average United States household in two months.
Look to the underlying technology
All this isn't to turn retail investors away from possibly investing in Bitcoin or other cryptos.
According to PGIM chief operating officer Taimur Hyat, crypto investors need to look into tokens with real-world utility:
Cryptocurrency gets all the breathless hype, but it's the underlying technology where we find the most interesting investment opportunities. Firms that enable real-world blockchain applications like clearing and settling transactions, preventing fraud, and tokenizing real assets offer significantly greater creation of value over the next decade. The old axiom applies — when there's a gold rush, invest in shovels and pickaxes.
The threshold for Bitcoin to diversify investment portfolios
Contrary to PGIM's take for institutional investors, Lisa Shalet, Morgan Stanley Wealth Management's chief investment officer, gave her input. Last year, Shalet said that even with their notorious volatility, cryptos like Bitcoin could help diversify investment portfolios.
According to Shalet (courtesy of the Australian Financial Review):
For speculative investment opportunities to rise to the level of an investible asset class that can play a role in diversified investment portfolios requires transformational progress on both the supply and demand sides. With cryptocurrency, we think that threshold is being reached.
The Bitcoin price is up 3% over the past 24 hours, to US$30,145.
