CRYPTOCURRENCIES
What are the pros and cons of cryptocurrencies?
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Given the recent debate about Tesla buying Bitcoin, the subject of cryptocurrency is a growing topic of debate in asset management circles. Daniel Murray, Global Head of Research and Joaquin Thul, Economist at EFG Asset Management dive into the detail.
he price of one bitcoin in US dollars quadrupled last year, gaining over 160% in Q4 alone. This meteoric rise sparked widespread media and investor interest in bitcoin specifically and in cryptocurrencies more generally. Moreover, many payment platforms such as BitPay, Square and PayPal have started accepting payments in bitcoin and other cryptocurrencies. It is also becoming easier to trade cryptocurrencies on established platforms. Here, we look at some of the potential advantages and disadvantages of cryptocurrencies.
ADVANTAGES 1. Potential for high returns In the five years to 31 December 2020, the S&P 500 index of large cap US equities has compounded at an annualised growth rate of 14.5% (in USD, net dividends reinvested); over the same time period the price of
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bitcoin in USD has compounded at an annualised growth rate of 131.5% (see graph below). 2. Potential diversification Some have cited cryptocurrencies as an alternative hedging instrument to gold in a portfolio context. For example, the S&P 500 declined in 17 out of the 60 months to end December 2020, of which the price of bitcoin rallied in seven. In the five years to the end of 2020 a portfolio consisting of 10% invested in bitcoin and 90% in the S&P 500 would have generated compound annual returns of 26.8%. 3. Limited supply There is a maximum of 21 million coins that can be created or “mined”. At the moment around 18.5 million bitcoins have been mined leaving less than three million still to come into existence. A related feature is that the rate of production of bitcoins slows over time via a process known as halving. In 2009 each block mined was worth 50 bitcoins, the value is now 6.25 bitcoins per block.
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