Bitcoin has arguably taken another step closer to becoming a mainstream asset after Ruffer revealed a large stake in the cryptocurrency, but its “notoriously volatile” nature suggests it isn’t right for every investor. 
Last week, the £416m Ruffer Investment Company announced that it initiated a 2.5 per cent “defensive” position in Bitcoin in November, funded by trimming its allocation to gold.
According to reports, asset management house Ruffer has bought the cryptocurrency – through a specialist manager – across several of its portfolios as well as the trust, amounting to a total stake worth £550m.
“We see this as a small but potent insurance policy against the continuing devaluation of the world's major currencies,” Ruffer Investment Company’s managers said. “Bitcoin diversifies the company's (much larger) investments in gold and inflation-linked bonds, and acts as a hedge to some of the monetary and market risks that we see.”
The trust’s latest factsheet shows it had 6.7 per cent of its portfolio in gold and around 35 per cent in inflation-linked bonds at the end of November.
Performance of Bitcoin over 2020
Source: Coindesk
The news came as Bitcoin reached a new record high, moving past the $20,000 mark for the first time. It was hit hard by the coronavirus sell-off at the start of 2020 and was trading below $5,000 at its lows in March but has rallied strongly since.
Given that Ruffer is a well-respected fund house with a strong track record in capital preservation, the move prompted some to declare that Bitcoin has entered the mainstream. But not everyone is convinced.
Dzmitry Lipski, head of fund research at interactive investor, said: “Rarely have we seen fund managers – and especially managers with a reputation for a capital preservation strategy – cross the threshold and introduce Bitcoin, which has been seen as hugely speculative – into their shareholder portfolios (as opposed to their own).
“But rather than a potentially speculative bandwagon, Ruffer describe their move into Bitcoin as a defensive hedge against monetary and market risks. Bitcoin may be useful as a diversifier in a portfolio for professional investors and they know better but it may take some time before Bitcoin and other cryptocurrencies become mainstream.
“Retail investors face excess amount of information (true and false) about Bitcoin but they still cannot easily access it via a conventional fund or other products. Therefore I’m still sceptical if Bitcoin can challenge gold as an asset class.”
However, it’s clear that professional investors are taking more of an interest in Bitcoin after some initial scepticism on the emerging asset class.
In 2017, Waverton Investment Management warned that Bitcoin “possesses many of the characteristics of a speculative bubble”. Over the following year, the cryptocurrency dropped by than 80 per cent.
However, despite the price is now at a record high, Waverton believes that there is a stronger investment case for the asset, offering several reasons why.
The first, according to Waverton’s William Hanbury, is the wider adoption of the cryptocurrency by US corporates. He pointed to the examples of software developer MicroStrategy and payment processing company Square, which recently revealed they had bought Bitcoin and saw their shares rise on the announcement.
“We think other chief executives, under pressure to find innovative ways of increasing share prices, may start to diversify some of their reserves into the cryptocurrency,” Hanbury added.
In addition, he noted that institutional investors appear to be interested in Bitcoin. The US-listed Grayscale Investment Trust, which invests 100 per cent of its proceeds in the cryptocurrency, has grown to more than $2.5bn in size.
The firm has launched further trusts focused on other cryptocurrencies and they are also attracting inflows at a fast pace, as shown below.
Grayscale cumulative quarterly inflows since inception – Sep 2013 to Sep 2002
Source: Grayscale, Waverton
Hanbury continued: “Unsurprisingly, others want in on the action. In August Fidelity, with $3.3trn under management, announced the launch of a Bitcoin fund and we expect more institutions will follow.”
Other factors that Waverton believes can be supportive for Bitcoin include sings that regulators in the West are warming towards digital currencies, their growing adoption in emerging markets and the backing of “hedge fund luminaries” like Louis Bacon, Stan Druckenmiller, Paul Tudor Jones and Alan Howard.
The combination of all these factors could drive further increases in Bitcoin’s price, even though it is close to record highs, according to the Waverton fund manager.
He pointed to George Soros’ Theory of Reflexivity, which suggests that there are sometimes occasions in financial markets when an asset's traded value can directly impact its intrinsic value - creating a feedback loop that results in dramatic price changes.
George Soros’ Theory of Reflexivity
Source: Waverton
“Together, we believe that these factors are resulting in Bitcoin developing a brand and that we are at the early stages of a positive feedback loop between its brand strengthening as price and adoption increase,” Hanbury said.
“There will likely remain a significant portion of people who question Bitcoin's ability to gain widespread support. Questions over its intangibility, complexity, lack of government oversight and a fear that the ‘cyber punk’ community that created it, could potentially destroy it mean they could never consider it an investment.
“While we have some sympathy with these concerns, we are firmly of the view they will quieten with time. The Bitcoin brand is likely to strengthen driven by increased regulation, further institutional sponsorship and more, potentially significant, price increases.”
But others argue that Bitcoin remains some way off fully entering the mainstream, despite the fact that investment houses are showing a growing interest in it.
Myron Jobson, personal finance campaigner at interactive investor, finished: “Bitcoin’s ascendency is difficult to ignore at a time where the traditional asset classes have struggled to produce good returns amid the coronavirus crisis, but we have seen all this before and it’s come crashing down to earth in the past.
“Whether history will repeat itself remains to be seen, but there is a sense from some of ‘this time it’ll be different’, stoked by the participation of mainstream investment firms.
“The fact remains that Bitcoin remains a risky and notoriously volatile asset. For many investors, the price swings have been simply too wild to stomach. Whether high-risk or low-risk, portfolio diversification remains the name of the game by assets and region to mitigate investment risk.”