Cryptocurrency: Does Cryptocurrency absolute fit into your asset allocation?

Cryptocurrency has been on almost every investor’s mind in the year 2021, especially those who haven’t invested into it. Currently India has the highest-ever number of speculators in cryptocurrency. There are more than 10,000 cryptocurrencies existing as of today and each with a varied track record.

Cryptocurrency: Performance as an Asset

The table below lists Top 10 Coins and their performance during the year (source: Financial Express) and also of the Top 10 Flexicap funds (in the last 1 year). Please note the difference in returns of the top performing Coin/ Fund and that of the 10th Coin/ Fund.

Top 10 Coins	Price on 1st Jan’21	Price on 16th Dec’21	Returns		Flexicap Funds	Returns (1Y)
Solana (SOL)	1.8	186	10233%		Parag Parikh Flexi Cap Fund	45.50
Avalanche (AVAX)	3.66	107.05	2825%		BOI AXA Flexi Cap Fund	44.50
Binance Coin (BNB)	38	543	1329%		PGIM India Flexi Cap Fund	43.35
Cardano (ADA)	0.17	1.32	676%		Franklin India Flexi Cap Fund	39.35
Ethereum (ETH)	730	4080	459%		Union Flexi Cap Fund	37.20
XRP	0.23	0.83	261%		HDFC Flexi Cap Fund	35.91
Polkadot (DOT)	8.3	27.54	232%		IDBI Flexi Cap Fund	35.39
Bitcoin (BTC)	29131	49104	69%		UTI Flexi Cap Fund	34.72
USD Coin (USDC)	0.9	1	11%		Edelweiss Flexi Cap Fund	33.13
Tether (USDT)	1	1	0%		HSBC Flexi Cap Fund	32.90
						as on 17th Dec’21

The above stated data partially illustrates the problem (and maybe the opportunity!!!) with cryptocurrencies: the asset’s performance is highly unpredictable and volatile and is bereft of any investment logic. Since the market (for crypto) is largely ‘imperfect’ (unregulated), the prospect of an ‘adverse’ regulatory outcome makes it (cryptos) a hot potato. This, along with the multiplicity of cryptocurrencies (about 10,000 of them as of now), makes it extremely difficult for an investor to analyse the opportunity objectively and to ensure a profitable track record on a sustained basis.

In my experience, investors, who have added crypto to their portfolios, end up utilising disproportionate bandwidth (time and effort) in managing their crypto exposure (it is almost a 24X7 activity) to maximise their returns through speculation (5-10% of their overall exposure to cryptos could take up 90% of their time). Another aspect, much ignored, is Risk. Any investment plan should strive to optimise the ‘returns per unit of risk’ and that is virtually impossible in the case of cryptos. Instead, if the same time and effort is utilised in managing better the 90-95% (non-crypto) exposure, the payoffs could be much better and that too in a risk-adjusted manner.

Clearly, cryptos still fall in the realm of speculation, and not investing. The call is yours to take.