The cryptocurrency market is up nearly 100% since the start of 2021. Major financial firms around the world invested heavily in cryptocurrencies to diversify their investment portfolios. JP Morgan, one of the world’s largest investment banks, mentioned recently in a market research note that investors can allocate 1% of their portfolios to Bitcoin and other digital assets.
According to a report published by Bloomberg, JP Morgan’s strategists including Joyce Chang and Amy Ho added that cryptocurrency assets are investment vehicles, not funding currencies. As of writing, the world’s largest cryptocurrency is trading around $46,000 with a total market cap of more than $860 billion.
Bitcoin started this year at a price level of nearly $29,000. The digital currency jumped around 100% to register an all-time high of $58,000 earlier this month. The total market cap of BTC crossed $1 trillion on 20 February 2021. Since then, BTC crashed nearly 20% after heavy selling pressure from retail traders.
“In a multi-asset portfolio, investors can likely add up to 1% of their allocation to cryptocurrencies in order to achieve any efficiency gain in the overall risk-adjusted returns of the portfolio,” the research note states.
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Risks in the Cryptocurrency Market
Nikolaos Panigirtzoglou, JP Morgan’s strategist, mentioned in a research note recently that Bitcoin is going through a liquidity crisis. Additionally, Panigirtzoglou mentioned that the volatility in cryptocurrency assets is a major concern for retail and institutional investors. In the recent note by Joyce Chang and Amy Ho, the strategists mentioned that cryptocurrencies have limits to their usefulness.
“Cryptocurrencies are investment vehicles and not funding currencies. So, when looking to hedge a macro event with a currency, we recommend a hedge through funding currencies like the yen or U.S. dollar instead,” research note added.
The supply crisis of cryptocurrency assets and a significant rise in unknown crypto transactions are major risks for the long-term growth and adoption of digital assets. According to a report by Crypto.com, there are more than 106 million cryptocurrency users around the world.