With interest rates low, managers of active fixed income funds are looking for ways to boost returns. Bitcoin could actually be part of that equation.
Bitcoin and other digital assets are considered alternative assets, meaning they’re unlikely to proliferate in significant fashion, but some managers may be nibbling at the largest cryptocurrency.
“At this point, nontraditional bond funds, which have the most latitude to take risks, are the most likely to incorporate some form of bitcoin exposure,” according to Morningstar. “In fact, BlackRock added prospectus language in January giving two of its mutual funds the flexibility to invest in bitcoin futures. That included nontraditional bond strategy BlackRock Strategic Income Opportunities (BSIIX) as well as BlackRock Global Allocation (MALOX).”
Institutional Adoption On the Rise, Despite Volatility
Institutional investors are playing an increasingly prominent role in the Bitcoin market, and that role is likely to continue growing. For smaller investors, there are tangible benefits to this scenario.
Cryptocurrencies remain largely unregulated, which has deterred many potential investors. The Securities and Exchange Commission has so far rejected exemptive relief for any attempt to roll out a Bitcoin ETF, arguing that there is not enough protection against fraud and market manipulation in the cryptocurrency market. However, institutional investors are moving past those concerns and embracing Bitcoin in a big way.
The reason Bitcoin is unlikely to become a substantial part of most bond funds is easy: volatility.
“Bitcoin has been 24 times as volatile as the Bloomberg Barclays U.S. Aggregate Bond Index over the past three years,” notes Morningstar.
Still, amid low global interest rates and central bank debasement of fiat currencies, Bitcoin is becoming a go-to asset for some high-level investors and companies.
“Rick Rieder, BlackRock’s global fixed-income chief investment officer, sees value in the asymmetry of bitcoin’s return profile,” adds Morningstar. “While some cite the cryptocurrency’s arguable similarities to gold, suggesting that it could provide a hedge against inflation or during market turmoil, Rieder remains skeptical about viewing it as part of an asset class. Rather, he views bitcoin futures as a call option on strong features including the development of its market infrastructure, large institutional investors entering the market, and the resulting increase in liquidity.”
For more on active strategies, visit our Active ETF Channel.