The asset management industry is now bifurcated. On one side, forward-thinking researchers have reached the conclusion that bitcoin has changed monetary technology as we know it. On the other is everybody else, whether ardently dismissing bitcoin or merely sitting on the sidelines.
Let’s be honest, naysayers are having a tough go of it in 2021. Tired arguments equating bitcoin to tulip mania are obsolete, and even the most seasoned investment professionals who previously brushed off cryptocurrency are either getting involved or admitting they might have missed something. This is causing investment managers who simply don’t yet own bitcoin for clients, the sideline crowd, to feel extremely nervous right now. And it comes down to fiduciary duty.
Nik Bhatia is the author of "Layered Money: From Gold and Dollars to Bitcoin and Central Bank Digital Currencies" (2021). He is a CFA charter holder and Adjunct Professor of Finance and Business Economics at the University of Southern California Marshall School of Business.
A fiduciary is somebody who has a legal obligation to take care of money on behalf of clients. The only remaining defendable excuse for an investment manager not yet allocating to bitcoin is price volatility. A fiduciary including bitcoin in a portfolio would launch the range of expected returns excessively wider than what was originally promised. A small 5% position in bitcoin could be extremely fruitful in a year like 2021 but cause massive underperformance in a year like 2018. In this thinking, the fiduciary has a duty to exclude bitcoin because of the potential negative impact on investment returns.
But price volatility doesn’t necessarily equate to outright risk, and herein lies the complexity. Fiduciaries have a duty to exclude bitcoin from portfolios due to price volatility, but they are actually taking on an entirely separate risk hidden in plain sight: the failure to correctly identify monetary reality. The dollar might not cease to be the world’s most popular currency denomination in the near future, but the stampede of 100 million people converting at least part of their savings and their mental denomination to BTC is shaking the ground of every land mass on the planet.
Those earthquakes resonate with a belief in bitcoin as a consensus mechanism used to determine what is money, or what is real. Now, saying that a fiduciary’s job is to identify an existential shift in monetary reality sounds like a stretch. However, fiduciaries focused on growth should recognize an asset that completed a decade of 200% compound annual growth. And if they haven’t, chances are they’ve started to underperform their peers.
The underperformance should lead a diligent investor to ask questions about bitcoin and the technological and geopolitical shifts associated with an internet-based, non-government currency. What does your fiduciary duty require of you? Can you afford to be entirely without ownership of what a growing percentage of the world’s population consider an alternative, fully digital and stateless monetary regime? When looked at from that perspective, it might be your fiduciary duty to own bitcoin for your clients despite its price volatility.
The only remaining defendable excuse for an investment manager not yet allocating to bitcoin is price volatility.
Here’s the correct thesis for investment managers asking these important questions in 2021: it’s time to own some bitcoin for clients. The base assumption for fiduciaries can no longer be a dollar-only future. The monetary and cryptography sciences have officially merged, and bitcoin has already achieved global reserve currency status. Not owning bitcoin is now the unhedged position. And in an era of financial instability, an unhedged position is ripe for disaster.
Owning some bitcoin, even if in the smallest nominal amount, allows fiduciaries to demonstrate an understanding that the world’s denomination is slowly changing, not away from the dollar to the renminbi or euro, but away from a dependence on government-issued currencies. The change is subtle, especially with the global economy entirely reliant on the current monetary infrastructure. But those willing to read between the lines have already purchased bitcoin for their client whether they call it a hedge, speculative bet, or monetary revolution.
There’s one final component to the argument for fiduciaries to allocate to bitcoin, and that’s human freedom. In the West, it’s incredibly easy to ignore bitcoin’s potential as a tool for financial empowerment – bitcoin receives demand from those looking to make a political statement against the monetary policy of the Federal Reserve and European Central Bank.
But we live in a world with serious problems plaguing our planet, such as environmental destruction, human trafficking, and politically-caused inflation. Today, so many fiduciaries are not only responsible for investment performance but also for advancing corporate responsibility and positively influencing societal change – financial index publisher MSCI now provides ESG (environmental, social, and governance) ratings for over 14,000 corporate issuers as sustainable investing is transforming the entire approach to investment management.
With bitcoin acting as an alternative in inflation-ravaged countries such as Venezuela, Argentina and Nigeria, it has the potential to alleviate human strife. Maybe after reading this article, fiduciaries might suppress their own fears of crypto-volatility to simultaneously pursue superior investment returns and social impact.