Does bitcoin have a place in institutional multi-asset portfolios?

Institutional investors have generally sat on the side lines during bitcoin’s fledgling ten years as an investable asset. In their role as fiduciaries for other people’s money, institutional investors have found it hard to justify investing in an unproven asset. But bitcoin – and cryptoassets in general - continue to demand the world’s attention. Undoubtedly motivated by meteoric returns over the past year or so, institutional investors are considering whether it is time to get in on the action.

Our stance

In the multi-asset team at Schroders, we’re comfortable sitting out bitcoin’s adolescent years. We’re not seduced by the headline numbers, nor do we feel the need to be an early mover among asset managers.

We do, however, think that bitcoin and its peers are worth seriously investigating. We’ve witnessed before how disruptive technology can be, and our approach to multi-asset investing is grounded in a humble acceptance of uncertainty about the future.

Traditional institutional investors are used to centralised, regulated asset markets, so it is understandable that an asset which plays by different rules can be scary. Fears of opaqueness and of bitcoin being used in illicit transactions are widespread in the traditional investment community.

But the reticence of the institutional investor community to embrace cryptoassets is a ‘chicken-and-egg’ problem. Institutional investors are waiting for cryptoassets to mature, but it is the process of organisations like ours embracing this new asset class that will lead to the professionalisation of the market.

As more and more pieces of the puzzle fit into place – clarity around regulation, efficient access and liquidity, security assurances, the emergence of enduring use cases - we expect far greater institutional involvement in the asset class. So, in this paper we lay out our take on a framework for institutional multi-asset investors to think about cryptoassets, using bitcoin as our focus¹.

Our assessment

We draw upon existing work in this space and combine it with our established framework for assessing asset classes. In our initial assessment of whether bitcoin is investible, we seek to understand four things:

1. Establishing intrinsic value – does it, or could it ever have, an economic role in the world?
2. Classifying the asset class
3. Understanding the regulatory environment
4. Portfolio construction and asset allocation considerations – can we make stable assumptions about its behaviour?

Establishing intrinsic value

It is important for us to determine at the outset whether bitcoin is expected to have reliably non-zero intrinsic value, either now or in the future. If not, then it is purely speculative and probably something we’re unlikely to engage with in the future.

In the debate about bitcoin’s value as an asset, we first need to consider the difference between financial assets and ‘useful’ assets; useful beyond their use as financial assets, that is. Having only a digital existence, bitcoin’s utility is likely to be limited to that of a financial asset. 

Bitcoin is proudly proclaimed to be an alternative to fiat currencies. However, if ‘fiat’ means that its utility derives from confidence and agreement about its value, as opposed to utility in its own right, then bitcoin could be classed as a fiat asset itself. 

Compare bitcoin to truly non-fiat currencies, such as gold, cigarettes, or fish. The latter three have use cases beyond their financial utility: jewellery, smoking, and eating, respectively. Although we might be proven wrong in the future, for now we can’t see any non-financial use cases for bitcoin².

¹ We assume some level of prior knowledge about cryptoassets, allowing us to avoid a discussion of certain technical, historical, and philosophical points.
² We do, however, recognise the entrepreneurial value of some of the more flexible blockchains and their respective assets, such as Ethereum. Ethereum – the blockchain - has promising use cases beyond the value of its native asset – Ether. A discussion of this is beyond the scope of this paper, but we hope to return to it in future work.