Some banks and financial institutions offer — or are considering offering — cryptocurrency to their investing clients, a move that strengthens the bitcoin bull case despite recent volatility. Just this week, Wells Fargo (WFC) announced that it would begin to offer cryptocurrency to some clients as interest spikes once again.
But the embrace of bitcoin on Wall Street is far from guaranteed. In a note Wednesday from UBS global wealth management, CIO Mark Haefele poured cold water on bitcoin, stressing its position that the cryptocurrency is a “speculative asset.”
“The portfolio benefits of holding cryptos are limited, in our view,” he wrote.
UBS’s take matters, because the institutional aspect has become increasingly important for bitcoin’s narrative. Speaking to CNBC on May 18, crypto evangelist Mike Novogratz said that Morgan Stanley (MS) “just trained 4,000 financial advisers to sell bitcoin” and that bitcoin fans are going to “have these armies of newly anointed proselytizers."
Putting aside the fact that proselytizing an investment isn’t exactly the job of a financial adviser, bitcoin bulls are watching financial institutions and large companies closely. This is perhaps best illustrated by Tesla’s (TSLA) relationship with the crypto asset, and how the price changes in response to Elon Musk’s internet commentary, particularly when he voiced concerns over its environmental impacts. Tesla has large stores of bitcoin, and its announcements and implications have swung markets.
In cautioning against holding crypto, Haefele pointed out that bitcoin’s volatility makes it not useful as currency.
“Weekly moves of more than 10% in bitcoin are common. In the week to 14 May, bitcoin fell 24%, which would be a high level of volatility for a small-cap stock, let alone a currency,” he wrote.
Some bitcoin enthusiasts like to call it “digital gold,” rather than an actual “currency” since it’s difficult to transact with. This may be a better characterization, as Haefele reminded his clients that, “only a handful of companies accept them as a means of payment” and that “most recently, Tesla reversed a decision to do so.”
But even this view is ebbing. In a recent note from JPMorgan’s Global Markets Strategy, analysts wrote that “institutional investors appear to be shifting away from bitcoin and back into traditional gold, reversing the trend of the previous two quarters,” suggesting that investors may be questioning the gold alternative narrative.
‘The best portfolio case’ for bitcoin
“The best portfolio case that can be made for cryptos is as a diversifier, given a low correlation to conventional assets,” Haefele wrote, though he added that this correlation has increased.
But “diversification alone is not a sufficient reason to add cryptos to a portfolio, in our view,” Haefele continued. “Investors also need to look at risk-adjusted returns to determine whether they are sufficiently compensated for the risk they are taking.”
UBS also is wary of the environmental issues that have attracted more and more attention from ESG investors like Tesla CEO Elon Musk and even Pope Francis.
"Crypto mining and management can contribute to carbon emissions without improving living standards, given the computing power required,” Haefele wrote, pointing to its well-documented energy requirements. “We are not convinced the growing cohort of sustainability-oriented investors can reconcile these problems.”
For these reasons, UBS is advising clients “to practice caution with crypto speculation.” If they want exposure to digital payment assets, UBS said they should “consider fintech—one of the emerging sectors we think might yield ‘The Next Big Thing’ for investors.”
Of course, this naysaying doesn’t mean that prices can’t go up, which Haefele notes, or that bitcoin isn’t a genius idea that might turn out to be useful and ubiquitous. But UBS’s lack of enthusiasm is a reminder there’s no guarantee of its adoption as an asset class. As Haefele adds, “We’re not currently aware of any essential real-world use cases.”
While Wells Fargo, Morgan Stanley, and others may be offering crypto options, the embrace of cryptocurrency on Wall Street as a recommended asset class beyond “speculation” is far from ubiquitous or a given.
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Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.
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