Over the past 15 years we have witnessed the incredible growth of the digital asset phenomenon. Bitcoin was the first scarce digital asset in history and is still by far the most traded and the one with the largest market capitalization, and it has since been joined by several projects that have tried to come up with different functionalities and solve different use cases. These assets as a whole were created as an alternative to the traditional banking and financial system, which consists of legal entities that are potentially bankrupt and in some cases are governed by managers who are oriented toward profit rather than customer protection. A system in which there is a widespread belief that Central Banks are “guardian angels” of the public, while their true conduct is in practice often dictated by dependence on governments and their temptation to expand the monetary base.
Looking from the point of view of professional investors, which is the point of view of Diaman Partners and many of our clients, this new investment category presents a mix of different characteristics, which leads us to consider it as a real asset class in the logic of portfolio selection and construction. To fully understand the value of digital assets from this different perspective, it is necessary to understand the premises from which they arose, and to look at how these different characteristics contribute to adding value in the portfolio in the logic of diversification and decorrelation.
Digital assets are thus the youngest asset class, and were initially born out of the need to design an independent, decentralized monetary exchange system based on the blockchain, which consists of a decentralized, transparent, and secure database without a trusted central intermediary to ensure its operation. One driver of cryptocurrency adoption is the demand for digital payments and a low-cost platform for sending and receiving money internationally, still a pipe dream for the traditional financial world.
A very important aspect of this new investment category is liquidity, that is, the ability to be traded quickly, even in large volumes, without penalty from the standpoint of realization value. In particular, digital assets, especially the most popular ones, show very high liquidity, at higher levels than traditional assets that are in themselves very liquid, which, however, can only be traded on weekdays during business hours. Instead, cryptocurrencies are widely traded on exchanges, in terms of volume, and are traded 24/7, as is rarely the case in traditional finance. The more recent development of ETPs and ETFs has greatly increased the accessibility of this asset class, even for those who are not technically savvy and rely for investment on custodial deposits from traditional intermediaries.
One of the most attractive features of digital assets is their low correlation with traditional asset classes, which opens up possibilities for diversification and value creation in portfolio allocation, where the inclusion of a small percentage in the portfolio improves its metrics. Our R&D department, as well as analyses from large asset managers, show that an allocation percentage between 2 and 10 percent, depending on the investor's risk profile, improves the expected return of the portfolio without significantly compromising its volatility.
Finally, a new transparent and decentralized financial system offers countless opportunities because of the way it is designed. New applications and instances of its are continually being developed, which only encourages the growth of digital assets, which are the “gasoline” that safely runs the blockchain “engine.” As time has passed, more and more professionals from various fields have collaborated to develop and regulate the digital asset framework and make it more secure and accessible. We have finally reached the point where we can say that digital assets are safer, comply with the rules of traditional asset classes, and are offered through secure financial instruments offered by professional intermediaries.
The Diaman Partners Research&Development Team