Its first and overarching conclusion is that there is a limited future for most cryptocurrencies. “The broad replacement of fiat currencies globally by cryptocurrencies is unlikely to materialise.
This is because cryptocurrencies can’t functionally provide the basic prerequisites of either a currency or a precious-metal substitute like gold.
On top of this PGIM sees the shortcomings being exacerbated by powerful headwinds from increasing regulatory scrutiny and the growth of central bank digital currencies that provide most of the functional benefits of fiat linked cryptocurrencies but with no credit or liquidity risk.
Most of the investment into crypto has come from retail investors’ speculation – prompted by fear of missing out and some opportunistic hedge fund arbitrage.
It’s a critical analysis that found there was little real-world evidence that cryptocurrencies deliver the diversification of mainstream assets, provide effective inflation hedges or have the intrinsic characteristics of a safe-haven asset.
Finally, but importantly, these assets have an environmentally negative impact at a point in time where ESG positive credentials are critically sought after by many portfolio investors.
As for the actual utility of digital currencies, PGIM’s analysis finds it fails on the three fundamental accounts – as a store of value, as a widely accepted medium of exchange or as a unit of account.
From an investment perspective, the merits of crypto as a hedge against inflation seem debatable. However, PGIM reckons there is limited evidence to support its usefulness as a hedge.
“In the lone episode of elevated US inflation since the introduction of cryptocurrencies, bitcoin provided only limited inflation protection. US prices were whipsawed during the pandemic and inflation began to soar steadily in 2021 and into 2022. The price of bitcoin moved with inflation only for a brief time before falling sharply. Gold, on the other hand, has demonstrated since the 1970s that it can be a reasonably effective and reliable long-term inflation hedge,” PGIM says.
While there are plenty of sensible reasons for portfolio managers to avoid this asset class which is way out on the risk curve and is still in its relative infancy, retail investors and speculators, particularly younger investors, view it as an attractive playground.
Volatility aside, investing in digital currencies is becoming better understood and more mainstream. Late last year the Commonwealth Bank announced it would offer customers the ability to buy, sell and hold crypto assets, directly through the CommBank app.
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