The ship has sailed on cryptos replacing government-backed currencies but their potential as a new asset class looks brighter, says Mackenzie chief economist
Mainstream adoption of Bitcoin as an alternative currency seems unlikely, according to one portfolio manager, who instead believes its growing appeal as a new asset class could point to its future.
Todd Mattina, senior vice president and chief economist at Mackenzie Asset Strategies Team, said the outlook for Bitcoin and other cryptocurrencies hinges of two key questions: will they challenge government-backed currencies as a means of payment, and will investors treat cryptocurrencies as a new asset class that deserves a place in well-balanced portfolios?
For Mattina, the latter has vastly more potential. He believes the ship has mostly sailed on the cryptocurrency’s potential to disrupt the traditional payments infrastructure, highlighting that the “velocity” of Bitcoin, a measure of how often the stock of Bitcoin changes hands, has fallen by half since 2017 and has barely grown throughout its recent one-year bull run.
He said: “Even after multiple tweaks to its blockchain technology, the Bitcoin network is still limited to below 10 transactions per second, a tiny fraction of Visa’s reported 24,000-per-second capacity.
“This scalability constraint is not easily solved and could lead to processing delays and/or high transaction fees, especially at times of peak demand. A multi-hour settlement delay and $10 fee, both of which are currently expected for a typical Bitcoin transaction, would discourage even the most techno-optimist shopper.
“Mainstream adoption of Bitcoin as an alternative currency for daily transactions seems unlikely. Semi-decentralized cryptocurrencies, such as Ripple, are more promising on that front, though they also have drawbacks in terms of weaker security and higher susceptibility to regulation.
“Off-the-blockchain workarounds, such as Mastercard’s plan to facilitate conversions from crypto to fiat currency at the point of sale, should help improve crypto’s credibility but without solving Bitcoin’s longer-term scalability issue.”
Instead, Mattina said Bitcoin could gain more ground in handling large international fund transfers, with fees being independent of transaction amounts, meaning transferring funds on the Bitcoin blockchain can be cheap and fast.
The other possible avenue for Bitcoin’ growing popularity is as a legitimate new asset class, even supplementing physical gold as a kind of “e-gold”. Both have a fixed supply and are secure, although there have been issues with crypto exchanges.
Mattina said that a typical well-diversified portfolio is likely to continue allocating a very limited weight to Bitcoin and other cryptocurrencies. However, there are drawbacks: extreme volatility with correlation to stock markets; an uncertain fair value; regulatory risk; and the fact there is still no clear cryptocurrency winner.
However, he added: “In this context, a long-horizon investor may only wish to hold a comparably small proportion of their portfolio in a sleeve of major cryptocurrencies, recognizing that even a small weight can lead to an outsized impact on total portfolio risk and returns given Bitcoin’s high volatility.”
