The Investment Rationale for Cryptocurrencies | Wells Fargo Investment Institute

Cryptocurrencies, in our horizon, have immediately evolved into a valid retainer as a portfolio choice for stipulate investors .
Cryptocurrencies do not pay interest or dividends, and there are no expect earnings to inform today ’ randomness prices. Yet, one sign of constancy is that cryptocurrencies appear to be developing fundamental short- and long-run monetary value drivers. depleted 5- and 10-year correlations with traditional asset course returns trace that the long-run determinants of cryptocurrency prices differ from those of traditional investing assets. In this way, cryptocurrencies are electric potential portfolio diversifiers, which we believe adds to the constancy and viability of cryptocurrencies .
Table 1. Insignificant long-term cryptocurrency correlations with select traditional investment assets

Period MSCI All Country World Index Bloomberg Barclays U.S. Aggregate Bond Index Bloomberg Commodity Index Gold spot price
From 1/31/2011 to 4/30/2021 0.15 0.01 0.05 -0.07
From 1/31/2015 to 4/30/2021 0.21 -0.02 0.14 -0.12
From 1/31/2020 to 4/30/2021 0.56 -0.01 0.45 0.17

Sources : Bloomberg and Wells Fargo Investment Institute, monthly data, January 31, 2011 to April 30, 2021 as of May 6, 2021. The price of gold is the intercontinental Exchange ( ICE ) U.S. dollar price per troy ounce. Cryptocurrency prices are represented by a composite ( December 2010 = 1 ) of our construction that systematically has captured roughly 90 % of market capitalization ( calculated as circulating issue times price ) and the growing diversity of the marketplace over time. The composite constituents are the price of Bitcoin from December 2010 to August 2015 ; a market-cap leaden combination of the Bitcoin and Ethereum prices ( market weights and Ethereum price from coincodex.com ) from September 2015 to July 2017 ; and the Bloomberg Galaxy Crypto Index from its origin in August 2017 through April 2021. As can be seen in Chart 2, foremost Bitcoin, and later Bitcoin and Ethereum in concert, represented roughly 90 % of grocery store capitalization until mid-2017. The Bloomberg Galaxy Crypto Index includes Bitcoin and Ethereum but adds other cryptocurrencies for diverseness, and represented approximately 90 % of market capitalization as of April 2021. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results.

inquiry indicates that macroeconomic and fiscal conditions are significant for cryptocurrencies, but probably are ephemeral price drivers over short-run horizons, such as the past 16 months.4 For model, the correlation coefficient between a cryptocurrency price composite and the MSCI All Country World Index, a benchmark index for ball-shaped equity prices, increased sharply during the January 2020 – April 2021 period ( table 1 ). The composite ’ randomness correlation with a commodity benchmark index was besides luminary .
The point is not that cryptocurrencies are evolving into equity and commodity substitutes, but that all three can share common factors or trends for a light time. In the case of commodities, the recovery from the ball-shaped pandemic created a large but likely temp increase in demand for fabricate goods and their commodity raw materials. Commodity price gains are probably to moderate as households shift to spending on services, but we do not expect family spend preferences to impact cryptocurrency prices. meanwhile, the cryptocurrency complex ’ s depleted short- and long-run correlations with gold ( table 1 ) suggest no intrinsic kinship between cryptocurrencies and commodities as commodity currencies. We foresee no developing vogue that would change the broken long-run correlation coefficient already observed between cryptocurrencies and commodities .
The pandemic besides appears to be playing a impermanent function in stronger correlations between cryptocurrencies and equities. here, a coarse policy factor may be at shape. Growth in the U.S. money provide surged in 2020, as monetary policy changed during the pandemic ( Chart 1 ). Money growth since 2020 was the fastest since 1981 and came with dramatically lower interest rates, which increased the necessitate for equities as an alternative to first gear fixed-income yields. That scend in money growth led or preceded the jump in cryptocurrency prices during 2020. Historically extreme money growth since 2020 besides raised ostentation fears and worries about eventual dollar degradation. In fact, some research finds a sharp lift since last year in media reports that note both cryptocurrencies and consumer monetary value inflation.5 Our expectations for above-average money supply emergence in the short term should attract more investors to cryptocurrencies and increase the depth of that market .
however, as with commodities, the senior high school correlation coefficient is improbable to persist. long-run concern rates already are rising as the pandemic fades. Money growth finally should slow from its rapid footstep, and fears of rising ostentation should fade with it. Chart 1 shows no perceptibly consistent positive or negative co-movement between cryptocurrency prices and money add growth before 2020. Most research that studies the relationship between cryptocurrencies and traditional fiscal markets ( i.e., equities, fasten income, currencies ) finds only a short-run correlation coefficient between cryptocurrencies and traditional fiscal markets.6 We expect the cryptocurrency-equity correlation to remain a irregular phenomenon .
In union, environmental ( for example, the pandemic ) or policy factors may elevate short-run correlations between cryptocurrencies and traditional investment assets. however, their persistently abject correlations over 5- and 10-year horizons suggest that the divers factors specific or idiosyncratic to cryptocurrency returns differentiate these assets from traditional assets. Looking ahead, we expect that the market for cryptocurrencies will continue to develop from break and singular factors, as we discuss below.

Chart 1. 2020 money growth acceleration preceded large cryptocurrency price increasesThe purple line with diamonds is an index of cryptocurrency prices. The red line without markers is the 12-month change in U.S. M2 money supply, in percent.Sources: Bloomberg and Wells Fargo Investment Institute, monthly data, March 2013 – March 2021, as of April 20, 2021. M2 is a measure of the U.S. money supply that includes cash, checking deposits, small time deposits and most money market funds. Cryptocurrency prices are represented by the same composite used to calculate the correlations in Table 1. Please see the note to that table for an explanation of the construction of that composite. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results. Sources : Bloomberg and Wells Fargo Investment Institute, monthly data, March 2013 – March 2021, as of April 20, 2021. M2 is a measure of the U.S. money issue that includes cash, checking deposits, little time deposits and most money market funds. Cryptocurrency prices are represented by the same composite used to calculate the correlations in mesa 1. Please see the eminence to that table for an explanation of the construction of that complex. An index is unmanaged and not available for direct investment. We view long-run provide and requirement as the chief factors in building stability. many cryptocurrencies have fixed supply caps, and some can only grow at qualify and often declining rates. ( As an exemplar, see footnote 3. ) potential demand growth for cryptocurrencies and blockchain is good equally authoritative as the provide constraints. The disruptive potential of decentralized systems could be boastfully across the economy. An entire system of such applications is developing to provide fiscal services – from trade to lending to hands. tied new decentralized stock and coin exchanges are emerging.7 These new digital applications do not have to pass through payer and payee banks, which increases approachability and reduces serve costs. a well, transactions validated by multiple participants adds foil. A growing group offers “ fresh contracts ”, which are basically legal contracts that execute automatically when specific conditions are met. Digital applications such as these could extend soon into healthcare, policy, and provide chain management, to name only a few .
The pandemic has accelerated these trends toward digitization, and artificial intelligence increasingly is a character of that digital approach to doing business. artificial intelligence refers to developing computers to perform tasks that normally require human intelligence. The Information Technology and Communication Services sectors have led in adopting artificial intelligence, particularly in using natural language systems to take customer calls.8 The lapp inquiry shows automotive and early assembly industries close behind, with robots on assembly lines, while the Utilities, Financials and Health Care sectors are advancing, but from the rear .
Cryptocurrencies complement the rise of artificial news by connecting payment systems to the broader automation drift. For case, a calculator may monitor the condition of machines and soap dispensers at a launderette, but adding a cryptocurrency-based payment system would allow the computer to decree and pay for soap deliveries as well. In sum, we believe the trends point toward more automation, and digital payment systems should further increase the candidate for lowering business engage costs .
Growing matter to during the past 11 years has brought more cryptocurrencies, larger market capitalization, and gradually improving consistency in cryptocurrency prices. Chart 2 indicates a broader diverseness in cryptocurrencies, and Chart 3 shows the equate increase in market capitalization.

Chart 2. Crypto market cap share among some leading cryptocurrenciesThis chart shows the share of crypto market cap and how it has evolved from May 2013 to May 2021. Bitcoin, Ethereum, and XRP are compared to all other crypto assets. The chart illustrates how Bitcoin initially accounted for mid-90% of all crypto assets. Bitcoin still dominates the space but the rise of other crypto assets has brought Bitcoin’s share of crypto market cap under 50%.Sources: CoinMarketCap, Wells Fargo Investment Institute. Monthly data: May 19, 2013 – May 2, 2021. Sources : CoinMarketCap, Wells Fargo Investment Institute. Monthly data : May 19, 2013 – May 2, 2021 .Chart 3. Total crypto market capThe chart shows how the total dollar amount of crypto market cap has fluctuated from January 2014 to May 2021. The chart illustrates the meteoric rise in market cap over the past year to over $2 trillion.Sources: CoinMarketCap, Wells Fargo Investment Institute. Monthly data: January 31, 2014 – May 7, 2021. Sources : CoinMarketCap, Wells Fargo Investment Institute. Monthly data : January 31, 2014 – May 7, 2021. Investments in a greater assortment of cryptocurrencies should imply a decreasing share of investors who buy or sell on any given news, which, in bend, should reduce price volatility. It has already. The annualized volatility in a cryptocurrency index was 160 % between July 2010 and August 2015, but halved to 80 % between August 2017 and March 2021.9 We besides calculated correlations between cryptocurrencies based on monthly monetary value returns. The same data and two periods besides showed increasing correlations between pairs of cryptocurrencies, particularly among those with the largest market capitalizations, indicating that the rising act of cryptocurrencies may reduce the idiosyncratic risks of holding any small subset.10

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