A handful of investment trusts have recently included cryptocurrencies in their portfolios, although most remain sceptical.
Crypto divides opinion, but there is no denying the strong performance by the likes of bitcoin and ethereum during the last year or so. The former now has a market value of over a trillion US dollars, which is material however you look at it, yet there remains a huge amount of uncertainty over how this whole area will play out.
Bitcoin recently hit an all-time high above $64,000 before falling back below $50,000 and at time of writing had found some support at around $55,000. Sentiment was buoyed by the successful listing of crypto exchange Coinbase on the Nasdaq, but has since been dented by the threat of higher capital gains taxes in the US.
Central banks including the Bank of England are currently exploring the possibility of launching their own digital currencies. These would be centralised systems, so they have a different appeal to the existing crypto market, but they would still potentially represent a serious threat to the level of investor demand.
Dipping a toe in the water
The first investment trust to include a direct exposure to crypto was the Ruffer Investment Company (LON:RICA). In late 2020 it announced that it had added a 2.5% exposure to bitcoin as a way to diversify its holdings in gold and inflation-linked bonds, with the three asset classes acting in unison to provide a hedge against monetary and market risks driven by the high levels of public debt and extreme monetary policy. It later sold around half the position following the strong bitcoin rally.
Reports suggest that Brevan Howard is preparing to invest in digital assets, including up to 1.5% of its main hedge fund, which would potentially be accessible via BH Global (LON:BHGG) and BH Macro (LON:BHMG). Both of these listed closed-ended funds have recently increased their fees and are currently considering a possible merger.
A less volatile option is to invest via a crypto exchange or platform. Examples include: RIT Capital’s (LON:RCP)holding in the unlisted exchange Kraken; Tetragon’s (LON:TFG) stake in Ripple Labs, the US tech company that developed the Ripple payment protocol and exchange network; and Scottish Mortgage’s (LON:SMT) investment in Blockchain.com.
Steering well clear
Most investment trusts have avoided this whole area, with one of the biggest critics being the Capital Gearing Trust (LON:CGT). It has a similar mandate to RICA, but is wary of these sorts of “token-based” currencies that have no fundamental worth and that have a history of incurring large price falls. You can read their view of bitcoin here.
If cryptocurrencies get to the point where they can be used more effectively on a transactional basis with appropriate security and an acceptable level of volatility then they will be here to stay. The main threat is potentially from governments and central banks, as if they get their act together they could successfully marginalise them and replace them with their own centralised alternatives.
Until then, crypto will continue to polarise opinion both amongst private and professional investors. Some believe that bitcoin’s next price target is $100,000, whereas others think it is due another massive collapse, with both groups advancing strong arguments in their favour. Given the huge uncertainty, a small exposure via an investment trust would be the safest way to play it.