The focus on the most recent price movements as a means to classify returns and prospects of cryptoassets emerges from variants and interactions of known behavioral concepts including availability bias, base-rate neglect, loss aversion and confirmation bias. Essentially, investors now mostly only recall the significant fall in prices(availability bias) without considering the longer term price history(base rate neglect) of the bitcoin. One of the reasons this may be apparent is that losses have a higher value than commensurate gains for investors(loss aversion) and create emotional pain. This type of analysis that only focuses on the price declines can be used to confirm that cryptoassets have proved a bad investment(confirmation bias), when in fact it has proved very profitable over longer periods and may do so in future periods.

We believe this to be a fundamentally incorrect way to understand the market. As investors, we want to understand the long term prospects of any assets, and such ferocious appreciations and market reversals hardly make a case for any type of normalized behavior. In fact, the price movements are, in our opinion, a strong reflection of ‘Animal Spirits’ at play. Indeed, in the last year we have seen the violent impact on crypto prices from herding inspired by greed and then fear. One thing is for certain, is that these behavioral impacts may have been even more accentuated by several factors such the globally low-interest rate environment(i.e cheap money) and a lack of at least some form of a standardized and accepted method for estimating fundamental values of cryptoassets. For these reasons, the removal of this ‘hype cycle’ and the accompanying dizzying price expectations are vital in maintaining a grounded investment approach.

A Little Crypto Goes A Long Way

So how do we separate what is real and what may be driven by temporal factors? One way to do this is to extend the time period of the analysis or holding period. As with any new technology there is likely to be considerable short term volatility, however as the technology gains slow and sometimes frustrating traction, value should appreciate proportionately. We have seen this with bitcoin. Investors who cottoned on to this dynamic in 2016 and allocated only a portion of their portfolio to the emerging asset would have benefited greatly in spite of the extremes seen in the transition between 2017 and 2018. The use of longer periods effectively nullifies or normalizes the massive rise and fall in prices over this period.

For purely illustrative purposes, we have looked at returns for three multi-asset Portfolios of varying risk and in turn allocations to major global asset classes in conjunction with an allocation to cryptoassets. The major asset classes that were used were as follows: