If you are someone who scouts the outer perimeter of the traditional investment landscape for new growth areas you will no doubt be familiar with digital currencies such as Bitcoin and Ethereum and the incredible opportunity they have offered savvy investors in recent years. However, unless you have been following these markets closely you may be forgiven for thinking that the “bubble” has burst, and the space no longer represents longer term value. You would be mistaken.
Digital currencies came to the attention of the mainstream investment community back in late 2017 when Bitcoin (and others) went on a parabolic move to $20,000 USD; a move that started at $400 USD back in 2016. The Fear of Missing Out, or FOMO as we call it, saw many buying at or close to the top and swiftly losing money as the market dumped, as parabolic markets do, all the way back to $3000 USD. The “Death of Bitcoin” was splattered across the headlines and comparisons to Tulip Mania and The South Sea bubble made for eagerly digested headlines but were far from the truth. You see bubbles burst by their very nature, they inflate, they burst and then they disappear often quicker than they appeared.
What you may not know is that in Bitcoin’s 10-year history the flagship digital currency has seen four such dramatic corrections (in excess of 80%) following parabolic moves; yet each time it has bounced back to trade on to significant new all-time highs, at multiples. In fact, if you remove the noise and simply strip Bitcoin back to it’s financial year lows alone; since inception it has quietly been achieving an average annual compounding growth rate of 165%.
Because, you see Bitcoin is not in a bubble, rather it has, as a result of its enormous potential, been experiencing “hype cycles”. The term, originally coined by the research and advisory firm, Gartner refers to a phenomenon whereby high growth is matched by high volatility and even higher expectations, leading to periods of apparent overvaluation or hype-cycles until eventually the technology is globally ubiquitous. Without scratching the surface, it is a defensible position to simply take the headlines at face value; but dig a little deeper and you find gold, digital gold!
The good news for investors is that the team at Cloudbreak Asset Management (CBAM) believe that not only has the bottom of the market been reached in this current cycle but the next big run is slowly starting to take shape and we expect this run to exceed the last in magnitude.
The even better news is that research shows a significant diversification benefit to including a small allocation of digital currencies in traditional portfolios, without any significant increase in risk. Digital assets or cryptocurrencies as they are often referred to are non-correlated with other assets classes. Better still, they are non-correlated AND exhibit asymmetric returns over the longer term. The table below demonstrates how an allocation of just 5% Bitcoin in a standard Global 60/40 portfolio over a five-year period dramatically improves that portfolio’s performance.
|Parameters||Global 60/40||+5% Bitcoin|
|Date Range||July 2014 – June 2019||July 2014 – June 2019|
|Annual Stand. Dev.||6.89%||7.58%|
The research clearly demonstrates that a small allocation in digital assets (in this case Bitcoin) within the context of a standard global 60/40 portfolio would have provided a more than doubling of annualised return over the period without any significant increase in volatility. The research also shows an impressive uptick in sharpe ratio, representing a strong improvement in risk-adjusted returns. It pays to keep in mind that this five-year period also included both the 2014/15 and 2018 bear markets. The true beauty of a history written in numbers is the objectivity it provides. It is of little consequence if you are a “bitcoin maximalist” or a “no-coiner”, the numbers speak for themselves and the story they tell is a compelling one.
Granted, the logistics around purchasing and safely storing digital currencies present significant hurdles to most. As does understanding and unpacking the determinants of value in this nascent asset class. And that is where professionally managed Funds like the Cloudbreak Digital Opportunities Fund are providing real value to investors by simplifying access to the digital currency markets via a familiar and secure vehicle.
The Investment Manager of the Fund, CBAM consists of traditional financial markets traders/analysts and blockchain and cryptocurrency global leaders and is perfectly positioned to assist you in obtaining exposure to the digital asset space. Our message to you, is that if you do not currently have any exposure to this space then it is time to “get off zero”. History paints the picture, we offer the vehicle but it is only you that can take action. Please feel free to reach-out to find out more and join us on this exciting journey at cloudbreakassets.com
CBAM is a Corporate Authorised Representative of AFSL 505011. The Fund’s Trustee and Administrator is Boutique Capital (ACN 621 697 621) and the Fund itself is open to sophisticated investors only.