Asset manager PGIM has dismissed cryptocurrencies as a viable investment within investor portfolios in its megatrends report.
Questions have been raised by investors over digital currencies throughout the year, following a drop in value of stalwart currency Bitcoin and the complete collapse of Terra ‘stablecoins’ in May.
The PGIM report went so far as to compare modern cryptocurrency to the ‘wildcat’ banking era of American history, in which state financial institutions launched their own, often highly unstable, currencies before the introduction of a federal currency in 1863.
Shehriyar Antia, head of thematic research at PGIM, said while cryptocurrencies have “heroic” aims, pricing is based on speculative behaviour and is an “unreliable diversifier and an inadequate safe haven asset or inflation hedge”.
He said: “Despite ongoing scepticism surrounding cryptocurrency, a number of traditional financial institutions have been making large investments into crypto recently.
“Based on the evidence, we at PGIM continue to view cryptocurrency as more of a speculation that is not yet suitable for long-term investment or fiduciary institutional portfolios.”
Risk-adjusted returns have not been much different than other asset classes, said Antia, “but with more frequent and greater drawdowns”.
He said: “To include any asset class in our client portfolios, we need to be convinced of three factors: it requires a clear regulatory framework, it must be an effective store of value, and it needs to have a predictable correlation with other asset classes.
“Cryptocurrency does not meet one of these three criteria currently.”
Antia added: “The unsettled regulatory backdrop and the significant ESG concerns – not just around climate but also around governance – pose additional headwinds for long-term investors and further demonstrates why we see no reason for cryptocurrencies to be a part of institutional portfolios.”
The PGIM report did however see value in crypto’s underlying blockchain technology, arguing that it represents a highly secure and robust system for verifying and recording transactions.
According to the report: “Investors would be wise to focus on blockchain use cases with well-defined practical applications that address real-world problems today, especially in the financial services sector.”
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