Wells Fargo & Co. plans to evaluate and offer an actively managed cryptocurrency strategy with its investment institution for qualified clients. Other investment products could be added in the near future. The trend of institutional adoption seems to be continuing.
In a report titled "The Investment Rationale for Cryptocurrencies" the Wells Fargo Investment Institute (WFII) announced that it views digital assets as an alternative investment for qualified investors, and plans to provide them access through a professionally managed fund.
"Cryptocurrencies have gained stability and viability as assets, but the risks lead us to favor investment exposure only for qualified investors, and even then through professionally managed funds." - Wells Fargo Team
Due to the complexity and ongoing evolution of these assets, they plan to issue a series of reports. The goal is to educate investors in order to improve their understanding of cryptocurrencies.
Improved regulatory certainty and increasing interest in digital technologies have led to a wide variety of cryptocurrencies with an increasing market capitalization. Given these developments, the Wells Fargo Global Investment Strategy team believes cryptocurrencies should gain legitimacy over time and show consistency as investable assets.
Bursts of rising volatility could persist, but they believe the evidence points to greater stability. Diversification opportunities, they say, make it an asset that can be used in portfolios in a controlled manner.
Cryptocurrencies as investible assets
Cryptocurrencies have become a valid portfolio option for qualified investors, according to the bank. Cryptocurrencies do not pay interest or dividends, and there are no expected returns that affect today's prices. One sign of stability, however, is that cryptocurrencies appear to be developing fundamental short- and long-term price drivers.
Low 5 and 10 year correlations with the returns of traditional asset classes suggest that the long-term determinants of cryptocurrency prices are different from those of traditional assets. In this way, cryptocurrencies are potential portfolio diversifiers, which contributes to the stability and viability of cryptocurrencies, Wells Fargo said.
Mainstream adoption of Bitcoin
Several key events in 2020 led to increased mainstream adoption and accelerated the maturation of cryptocurrency markets. U.S. banks received regulatory permission to hold cryptocurrencies for the first time. The investment industry and regulators took further steps to expand the legal and regulatory framework that would help solidify cryptocurrencies as investable assets.
In March, Morgan Stanley became the first major U.S. bank to offer clients access to Bitcoin funds. They will soon be joined by JPMorgan. Goldman Sachs has decided to allow investors on Wall Street to trade Bitcoin derivatives. In February, Bank of NY Mellon Corp. launched a new unit to help clients hold, transfer and spend digital assets.
The Coronavirus pandemic also played a key role. It accelerated the digital economy by returning to near-zero interest rates, sparking inflation fears and interest in alternative payment systems.