In this primer, we describe the investible characteristics of cryptocurrencies, including their potential to offer diversification benefits. We offer an overview of investment platforms and vehicles currently available, and we also touch on the current regulatory landscape.
We find that digital currencies potentially offer several attractive characteristics, most notably including the ability to serve as a novel diversifying asset class with some gold-like (e.g., inflation hedging) properties. In addition, the development of investment vehicles, derivatives, trading capacity, and custodial services indicate its potential as an institutional asset class. However, there are several risks currently inherent to cryptocurrencies that are either unique to the asset class or considerably amplified relative to similar assets (e.g., gold). These include exceptionally high volatility, regulatory uncertainty, and rapidly evolving technology and competitors (including central bank digital currency initiatives).
On balance, we find that institutional investors should carefully weigh all of the explicit and implicit risks before investing in cryptocurrencies.