Our new digital assets newsletter

We are seeing a lot of interest in the fast growing digital assets space among clients and almost everyone we talk to here at Highline Wealth Partners. To provide our community with education and information, we decided to start publishing a short newsletter summarizing some of the most interesting news, studies, and developments going on in digital assets. While we can’t possibly cover everything, this letter is meant to be a short weekly read to keep people up to date.

Here is the first addition, which we published last Friday.

The world of Digital Assets is changing 24/7/365. We have created a weekly educational update to help you navigate this complex world and what it means to your Financial and Investment planning.

1/10/22 What Happened This Week

1) The Cryptocurrency complex remains under pressure with Bitcoin trading in the $42,000 range and Ethereum around $3400. This in response to last Wednesday’s release of the December Fed minutes. The minutes were hawkish and inline with current policy statements. Moreover, the Fed discussed accelerating the tightening process and removing excess liquidity from the Fed Balance Sheet.

2) A Congressional subcommittee is preparing a hearing to examine the environmental impact of cryptocurrencies, specifically bitcoin mining, according to sources with knowledge have told The Block.

3) PayPal Holdings Inc. is exploring the launch of its own stablecoin as part of its cryptocurrency strategy.

4) Mobile payment service Cash App has added a layer-2 payment protocol Lightning Network to allow users to transact with Bitcoin, according to reports by users.

5) Following comments regarding central bank digital currencies (CBDCs) and a Fed digital dollar, Fed Chairman Powell announced that digital asset industry members and lawmakers can expect a report on digital currencies in the coming weeks.

6) Crypto accounting firm TaxBit has launched a network allowing users to connect accounts across the crypto ecosystem to generate their transaction history when filing their taxes.

7) A group of U.S. banks plans to offer its own stablecoin, called USDF, in order to address concerns about the reserves backing nonbank-issued equivalents. Banks include Synovus, New York Community Bank, First Bank of Nashville and Sterling National Bank. While these institutions are FDIC-insured, the announcement does not clarify if the reserves backing USDF would qualify.

Friday Focus: What’s the Impact of Bitcoin on a Traditional Portfolio?

It seems to us that the Crypto complex has been increasingly correlated with the stock market and other risk assets lately. But what about over the longer term? Cryptocurrency index provider Bitwise recently updated “The Case for Crypto in an Institutional Portfolio”, a study to address this question. Using industry standard asset allocation models, they found a strong positive impact on traditional portfolios by adding just a 2.5% allocation to Bitcoin over a 7.5 year period from 2014 to 2021. Bitcoin was used as a proxy for all cryptocurrencies in this study because it has the longest track record (it was the first cryptocurrency after all), and the best dataset.

Key Findings:

1) A 2.5% allocation to Bitcoin added to a traditional 60/40 stock bond portfolio would have increased the cumulative return by 13.5% over the 6.5 year period.

2) The annualized return was improved to 10.2% from 7.7%.

3) The increase in annualized volatility was surprisingly modest, up to 10.4% from 10.2%.

4) The Sharpe ratio, a measure of investment efficiency, increased to .86 from .61, which is an increase of a whopping 41%.

5) Using a rolling period analysis to slice the returns into a large number of multi-year periods, the allocation would have boosted returns in 100% of the three year periods, 97% of the two year periods, and 77% of the one year periods.

6) To measure the effect of poor market timing, when the allocation was added at peak valuations just before the four major corrections in the history of Bitcoin, long term results improved over two and three year periods. In the worst case scenario, for investing right before the correction starting in December 2017, the maximum negative impact was -3.2%.

These results demonstrate the power of diversification, even when dealing with volatile asset classes.

Reach out to us if you would like to read the paper or discuss it in more detail, or receive this newsletter by email, at rich@highlinewp.com.