Chart of the Week

In our April 6 Institute Alert, “Adjusting targets, guidance and allocations,” we initiated coverage of Digital Assets as a sector within the Commodities asset class and with neutral guidance. Digital assets are emerging as a potentially compelling addition to diversified portfolios in our view, offering exposure to potentially transformative technologies such as artificial technology (AI), automation, and next-generation payment systems.

While digital assets' volatility represents a risk, we think it largely reflects their relative novelty. As shown in the chart above, the dispersion of Bitcoin’s daily price returns is roughly half of what it was in 2018, reflecting lower volatility. Further, the decline has accompanied an increasing diversity in who owns Bitcoin, particularly institutional investors.

We expect that continued (especially institutional) adoption of digital transactions should reinforce the potential economic utility of digital assets. In turn, we believe that the trend toward generally wider investor adoption will likely reinforce long-term price stability. In our view, now may be time to consider a measured allocation of 2% – 3% for portfolios with growth-and-income or growth objectives, aligned with investor risk tolerance.

Digital assets are not a physical currency, nor legal tender. Investors must have the financial ability, sophistication/experience and willingness to bear the risks of an investment, and a potential total loss of their investment. An investor could lose all or a substantial portion of their investment. Digital assets have limited operating history or performance. Digital Assets are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not backed or supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional fiat currencies.

Digital assets are a speculative investment and involves a high degree of risk. Investors must have the financial ability, sophistication/experience and willingness to bear the risks of an investment, and a potential total loss of their investment. An investor could lose all or a substantial portion of his/her investment. Cryptocurrency has limited operating history or performance. Fees and expenses associated with a cryptocurrency investment may be substantial. Cryptocurrencies are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not backed or supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional fiat currencies.

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