Are Cryptocurrencies An Asset Class? Yes And No

The second reason to have asset classes is that it's hard to compare different types of assets, like a stock with a bond. Once you decide on an allocation to an asset class, you can look over all the assets in that class, and select the best combination for your goals. If the only thing you care about with a cryptocurrency is its price history, then it's in with equities. If you plan to read whitepapers, interview developers, test code and model issuance, then cryptocurrencies need their own category, because that's nothing like stock or bond research.

That leaves a middle group of investors who care about cryptocurrency fundamentals, but plan to delegate the research either to managers in an active fund or to the market in an index fund. Here the choice is how you plan to evaluate investments. If you're going to use traditional metrics such as alpha and Sharpe ratio, then these funds are equities. You use them to the extent they improve the risk-return ratio of your equity allocation.

On the other hand, if you think the manager's job is not to make profits in dollar terms, but to make your cryptocurrency grow in cryptocurrency terms, then they need their own asset class. Is your plan to sell your cryptocurrency fund when you retire, for cash to support your retirement? Or is it to use the cryptocurrency represented by your fund to support your retirement directly?

Don't let know-it-alls tell you that you either have to or can't treat cryptocurrencies as an asset class. That decision has nothing to do with correlations or trading volume, market cap or projected returns, governance or regulation. It's about how you plan for the future. If you view cryptocurrencies as a potential way to increase your traditional wealth, then they belong in traditional asset classes. If you regard them as connections to a new type of wealth, then they need their own class.

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Footnotes

  1. From this perspective, assets need not be assigned to their nominal classes. You might buy a distressed or convertible bond for appreciation and put it in the equity asset class, or a treasury bond for liquidity and classify it as cash. Moreover, assets such as high-dividend stocks can straddle classes.

  2. That would put cryptocurrencies in the equity asset class.

  3. That makes cryptocurrencies real assets.

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