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Bitcoin boom and bust reveals value of 'boring' approach

In an age where market behaviour is increasingly erratic, an asset manager has praised a “boring, consistent approach” over one that is fuelled by sentiment and hype.

“Excitement in investment is rarely a good thing,” said Lewis Grant, global equities senior portfolio manager at Hermes Investment Management. “It can create hype which in turn can lead to irrational behaviour.”

Last year the world witnessed the meteoric rise of cryptocurrencies led by Bitcoin, which peaked at a value of $20,000 in December having started the year below $1,000. On Monday August 13, Bitcoin dipped below $6,000.

“Hype around investment in the cryptocurrency drove the asset class to grow at a phenomenal rate and for a while, this sentiment-led growth may have left investors feeling excited about potential returns,” said Grant. “We believe it is important to remain emotionally unbiased as euphoria should not be the goal of investing.”

Some commentators are bearish about cryptocurrencies.

“It is reasonable to consider the probability, in view of the markets, that the value of Bitcoin will fall to zero and become useless,” said Yale economist Aleh Tsyvinski.

“If you as an investor believe that Bitcoin will perform as well as it has historically, then you should hold 6% of your portfolio in Bitcoin. If you believe that it will do half as well, you should hold 4%. In all other circumstances, if you think it will do much worse, then you should still hold 1%. Of course, one has to remember that, as with any other assets, past performance is not a guarantee of future returns.”

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