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CommBank users will soon be able to buy crypto – but should they?

Lewis Jackson  |  10 Nov 2021Text size  Decrease  Increase  |  
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Investors uncomfortable with the wild west of cryptocurrency wallets and exchanges will soon be able to buy digital currencies from the familiarity of the CommBank app. Is that wise? Morningstar is here to help.

Australia's largest bank announced last week it would give users of its banking app access to ten different cryptocurrencies including Bitcoin, Ethereum, Bitcoin Cash and Litecoin. An invite-only pilot is set to start in several weeks. Users and features will be progressively added into next year. For now, not much more is known.

Commonwealth Bank CEO Matt Comyn said the bank's decision to offer crypto services was driven by customer demand and a significant number of new players entering the market. The tax office estimates over 600,000 taxpayers have invested in crypto assets at some point in the past few years.

BTC Markets CEO Caroline Bowler predicts CBA's move will "open the floodgates" for other traditional financial services providers to move into cryptocurrencies.

For those weighing up the lucrative but volatile asset class, we’ve looked over what Morningstar’s analysts and writers have said about cryptocurrency—particularly Bitcoin and Ethereum—over the last few years to answer key investor questions: do cryptocurrencies have a future? Is there a non-speculative investment case? How much to buy? What are the risks?

Are cryptocurrencies all going to zero?

Probably not but there’s no guarantee. Morningstar’s analysts and writers think low interest rates, untapped interest from investors and grudging regulatory approval mean some form of cryptocurrency is likely to stick.

“It's hard because we're only a little over 10 years into cryptocurrency…but based on the growing acceptance of cryptocurrency by financial institutions and regulators, there are signs that it might be around for a while,” says Morningstar director of equity research Kristoffer Inton.

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For Morningstar columnist John Rekenthaler, low interest rates and easy money will support investor interest in coins such as Bitcoin. That and the fact that potential buyers of bitcoin heavily outnumber actual owners.

For investors, the question is not whether cryptocurrencies will survive but whether the cryptocurrency one owns does. The survival of cryptocurrencies does not guarantee the success of any single coin. Government interest in digital currencies bodes well for the technology but doesn’t mean Dogecoin or even Bitcoin will stick around. Early movers are often overtaken; remember Myspace?

“There’s nothing preventing competing cryptocurrencies from emerging," says Morningstar portfolio strategist Amy Arnott. "There are already numerous bitcoin alternatives available, including Ethereum, Litecoin, Cardano, Bitcoin Cash, and Lumens, to name a few.”

Why buy? Digital gold, portfolio hedge or speculative bet

Stocks and bonds are priced relative to the future streams of income they give investors (and our unstable expectations of those streams). Sans income, prospective cryptocurrency investors need to buy into one of several interrelated theses:

  • Value as a collectible such as digital gold
  • Value as a portfolio hedge or diversifier
  • Value as a speculative bet on the future

Collectible and digital gold

Like gold or baseball cards, there’s a case for holding Bitcoin because others do. The more people hold it, the better a store of value it becomes. Gold is the best example of this. Notwithstanding industrial uses, most gold is produced because humans have stored and worn the shiny metal for millennia, says Rekenthaler:

“It also serves as a collectible. Which is how bitcoin should be evaluated. The question with collectibles is not whether they fulfil a useful function, but rather, if their allure will persist.… one could also call gold bullion a collectible. Unless the metal is fashioned into jewellery, or put to industrial work, it fulfils no purpose. Yet gold has retained its value for several millennia.”

For now, there’s plenty of investor demand. Rekenthaler quotes a survey by the fund provider Bitwise Asset Management that while only 9% of financial advisors have placed client money into cryptocurrencies, among those who hadn’t, nearly one in five planned to do so before the end of this year.

Portfolio diversifier and hedge

Closely linked to claims about digital gold is the case for cryptocurrency as a portfolio hedge or diversifier.

The case for portfolio diversification rests on the low correlation to stocks and bonds. For example, Ethereum had a 0.12 correlation to US stocks and bonds. A correlation of 1 means the assets move in tandem.

Note that correlations to traditional asset classes are increasing as cryptocurrencies enter the mainstream, especially in the case of Bitcoin.

Bitcoin correlation edges higher

(Click to enlarge)


Some claim cryptocurrencies hedge against inflation or the collapse of the traditional financial system. The latter is difficult to assess but both Ethereum and Bitcoin are negatively correlated to the US Dollar and can serve as a hedge for investors worried about its decline.

“For conventional investors, it’s probably best used in (very) small doses as a hedge against weakness in the dollar and major disruptions in the global financial system,” says Arnott.

Claims about either as an inflation hedge are theoretical at this point given most of the developed world has been desperately short of inflation for over a decade.

Gold is probably still the better safe-haven asset, says Arnott. It performs better in downturns and is slightly less correlated to stocks, at 0.05.

A speculative bet on the future

Cryptocurrencies are best known as speculative bets on utopian futures.

Ethereum is most associated with grandiose visions. Backers argue it will power the incipient world of decentralised finance – think finance without intermediaries like banks and exchanges. Hundreds of applications are being built on Ethereum and underpin its value for those that believe in its revolutionary potential, writes Arnott:

“Ether is so volatile that you could argue (and crypto aficionados probably will) that it doesn’t really fit into a traditional portfolio analysis framework. It’s more of a speculative play on the long-term shift toward digital money and an ongoing revolution in the financial technology landscape.”

Today’s investors should question whether past gains will repeat. Regulation and mass adoption mitigates the risk of total collapse, but greater stability may also limit the prospect of 1000% gains.

How much to buy?

As a hedge? Not much. As a speculative bet or collectible? Only what you can afford to lose.
A portfolio can be hedged or diversified with very little Bitcoin or Ethereum. Arnott and Rekenthaler quote figures ranging around the 2% mark or less.

“On a risk-adjusted basis, though, a tiny sliver of ether looked the best. The portfolio that allocated just 0.5% of assets to ether ended up with the highest Sharpe ratio [a measure of returns adjusted for risk],” says Arnott.

The massive jump in volatility that comes with adding cryptocurrency means this won’t be suitable for many investors. Even a 2% stake in Ethereum more than doubled a portfolio’s standard deviation, a measure of volatility, over the past five years.

(Click to enlarge)

For those willing to stomach volatility on the way to the utopia of decentralised finance, only risk what you can afford to lose, says Inton:

“There's always the possibility that speculative assets could lose all their value... think about your financial situation. Someone that needs asset preservation, like being near retirement, or someone young in their career have very different financial needs,” he says.

Remember that we’ve been here before

For all the technological novelty, this is not the first nor the last speculative bubble, says Morningstar Investment Management chief investment officer Dan Kemp. Through history, excitement about a new technology and low interest rates have coalesced in speculative fevers for everything from emerging markets to railroads. Many paper millionaires are minted, not all survive.

“The question is whether people can hang on to that wealth, and that's dependent on two things. The first is the underlying quality of the asset, but also the distance between what is a fair value of a particular asset and what the price is. The greater the difference between the fair value of the asset, the higher the likelihood that people can lose money or even worse get sucked in at the top of the market before it falls.”

Speculative fevers can build for decades or burn out in a few short years. In their book Trade Wars are Class Wars, Matt Klein and Michael Pettis cite eight global financial boom and bust cycles since the 1820s. The shortest ran for three years, the longest for nearly 25. Keep that in mind.

is a reporter and data journalist with Morningstar. Tweet him @lewjackk or get in touch via email

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