Investment Insights Monthly - Benjamin F. Edwards
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One North Brentwood Boulevard, Suite 850
St. Louis, Missouri 63105
TF (855) 382-1600
www.benjaminfedwards.com
Member SIPC
Investment Insights Monthly
From The Desk of Bill Hornbarger, Chief Investment Officer June 2021
A Few Thoughts on Cryptocurrencies
So far, 2021 has been an unprecedented year for What Is Cryptocurrency?
cryptocurrencies. Extreme volatility, the proliferation of Cryptocurrencies are virtual currencies that are a digital
new investment vehicles, daily headlines and “celebrity means of exchange that use cryptography1 for security.
endorsements” have dominated financial news. Increasing They have no physical form, exist only in the digital network
news of institutional interest has fueled the debate about and are created, exchanged and regulated by their users.
more mainstream adoption. Investors are torn between No cryptocurrency prints actual money or mints actual
FOMO (the fear of missing out) and skepticism over crypto’s coins, and the supply of cryptocurrency is not determined
future. There is also the fundamental question of whether by a central bank. Instead, they are digitally “mined,” and
crypto is an investment or a currency. Whatever one’s their networks are decentralized. A cryptocurrency has
view, we feel it is important for investors to have at least no intrinsic value, and it currently cannot be exchanged or
a basic understanding of cryptocurrencies and the news redeemed for another physical commodity such as gold.
surrounding them. Bitcoin is the name of the best-known cryptocurrency,
the one for which blockchain technology was invented.
1
According to Wikipedia, “Cryptography prior to the modern age was effectively synonymous with encryption, converting information from a readable state to unintelligible
nonsense… . Since the development of rotor cipher machines in World War I and the advent of computers in World War II, cryptography methods have become increasingly
complex and its applications more varied… . Modern cryptography is heavily based on mathematical theory and computer science practice; cryptographic algorithms are
designed around computational hardness assumptions, making such algorithms hard to break in actual practice by any adversary. While it is theoretically possible to break
into a well-designed system, it is infeasible in actual practice to do so. Such schemes, if well designed, are therefore termed ‘computationally secure.’”
One North Brentwood Boulevard, Suite 850
St. Louis, Missouri 63105
TF (855) 382-1600
www.benjaminfedwards.com
Blockchain is most associated with Bitcoin but can be used for other purposes, and its application is expanding rapidly.
Major companies are exploring blockchain to simplify and strengthen supply chains. There is a potential application to
reduce/eliminate voter fraud, and there is even a case of a couple marrying on the blockchain.
How Blockchain Works
Source: PwC
What About Regulations? commodities. The SEC has ruled that both Ethereum
The regulatory environment for cryptocurrencies is both and Bitcoin are digitalized commodities due to their
fractured and confusing, and high-ranking members of decentralized blockchain structure while leaving the door
the current administration have acknowledged the need open for centralized blockchain networks to potentially
for better and more consistent regulation. The Securities be categorized as securities. Other examples of the
and Exchange Commission, Commodity Futures Trading ambiguity surrounding cryptocurrencies include the fact
Commission, Internal Revenue Service, Financial Crimes that FinCEN does not consider cryptocurrencies to be
Enforcement Network of the Treasury Department legal tender but considers cryptocurrency exchanges to
and Congress all have – or desire – some portion of be money transmitters. And, the IRS does not consider
regulation over cryptocurrencies and the exchanges cryptocurrency to be legal tender but defines it as “a
where they are traded. Tokens that act like securities digital representation of value that functions as a medium
could fall under the regulations of the SEC, while the of exchange, a unit of account, and/or a store of value” and
CFTC has taken the position that cryptocurrencies are has issued tax guidance accordingly.
2
One North Brentwood Boulevard, Suite 850
St. Louis, Missouri 63105
TF (855) 382-1600
www.benjaminfedwards.com
Bitcoin and other cryptocurrencies are also viewed also proven to be highly volatile investments that pay no
inconsistently around the globe. For example, China interest or dividends.
has an active community of crypto traders and is a
hotspot for mining activity. However, China’s regulators
What About Performance?
recently banned financial institutions from most uses of
One of the reasons that Bitcoin and other cryptocurrencies
cryptocurrencies, and the country has introduced its
are in the news and on investors’ radars is their
own digital currency, something that many believe will
performance. Even with the recent correction in many
be followed at some point by a U.S. “digital dollar.”
cryptocurrencies, their returns have been very strong,
particularly since the pandemic lows of last March.
Are Cryptocurrencies In Fact Currencies?
Per Investopedia, “currency” is a generally accepted However, that performance has come with extremely
form of payment, usually issued by a government and heightened volatility – far in excess of other more
circulated within its jurisdiction. Nouriel Roubini, familiar investments. On April 17, Bitcoin fell nearly 14%
professor of economics at New York University’s Stern in an hour on unconfirmed rumors related to money
School of Business, says that, “Currencies must have laundering. Elon Musk (via Twitter) has contributed to
four qualities: they must be a unit of account, a means Bitcoin’s volatility in both directions, first by a pledge to
of payment, a stable store of value, and act as a single accept Bitcoin as payment for Tesla vehicles and then by
numeraire.” Bitcoin and other cryptocurrencies fail on reversing that pledge. This volatility is one of the reasons
all four counts: nothing is priced in Bitcoin, cryptos are that cryptocurrencies, in our opinion, should be viewed
highly volatile and multiple different coins exist. We as an investment as opposed to a currency, and is a key
would suggest that cryptocurrencies are non-traditional consideration for potential investors.
investment vehicles as opposed to currencies. They have
Performance of Selected Crypto Indices
YTD 2021 (as of June 3, 2021) 1-Year
Bloomberg Galaxy Crypto Index 131% 518%
Bloomberg Galaxy Bitcoin Index 33% 304%
Bloomberg Galaxy Ethereum Index 281% 1,008%
Compass Crypto Reference Index Dogecoin 8,066% 15,390%
XRP Liquid Ripple Index 365% 410%
Source: Bloomberg
Standard Deviation and Drawdown
1-Year SD 5-Year SD
1-Year Drawdown 5-Year Drawdown
(monthly annualized) (monthly annualized)
S&P 500 11.4% -11.3% 16.32% -33.9%
Gold 15.4% -18.6% 13.1% -18.6%
Bitcoin 84.6% -45.3% 93.6% -83.3%
Source: Y-Charts
3One North Brentwood Boulevard, Suite 850
St. Louis, Missouri 63105
TF (855) 382-1600
www.benjaminfedwards.com
Other Considerations
Cryptocurrencies come with significant risks that include the aforementioned volatility, the impracticality as a means
of exchange, the murky regulatory environment and the negative carry. Investors who view it as a hedge against equity
risk were disappointed during the bear market in late February and March of last year, when diversification was a greatly
desired attribute. Only time will tell whether the thesis that crypto assets will provide protection against the debasement
of fiat currencies will prove true.
On the positive side, blockchain technology has a promising future with multiple applications, and cryptocurrencies have
other positive attributes including durability, high portability and increasing institutional interest.
In Summary We do strongly believe that cryptocurrencies are risk
Each individual investor is unique and must decide if some assets that have exhibited volatility significantly higher
small allocation to crypto assets fits in their overall investment than other risk assets (i.e., equities, commodities,
strategy. We would point out that, with an asset as volatile Master Limited Partnerships, REITs). As such, we would
as cryptocurrencies, sizing an allocation is very important, recommend they only be used by investors pursuing
since even a small allocation can have a noticeable impact on aggressive strategies since their hedging qualities are,
performance. It is also important to note that this heightened to date, largely unproven. In closing, while the fear of
level of interest and activity around cryptocurrencies has missing out is a great motivator, we would advise any
been seen in previous periods in other assets such as gold, investor allocating to cryptocurrencies to invest no
BRIC, tech stocks, FANG stocks and collectibles. more money than they can afford to lose.
4One North Brentwood Boulevard, Suite 850
St. Louis, Missouri 63105
TF (855) 382-1600
www.benjaminfedwards.com
Asset Class Returns
Comparing Recent Month and Trailing One-Year Total Returns
25
20 18.94
18.04
15.3
15
12.62 12.14
10.39
10
7.36
5 3.36
2.34 2.73
2.25
0.94 0.80 1.09
0.3 0.78 0.33 0.3 0.7 0.47 0.21 0.49
0
-2.29 -2.35
-5
1-Month
1-Year
Source: Morningstar
Fixed Income
· Benchmark Treasury yields moved very little during May. The 10-year benchmark Treasury note traded in a 13-basis point
(bps) range and ended the month with a less than 1 bps change in yield. Other maturities exhibited a similar pattern.
· The stable yield and spread environment resulted in credit outperforming government benchmarks.
· Bonds outside the U.S posted the strongest gains, helped by falling rates and a currency boost from the weaker U.S. dollar.
Equities
· May saw a continuation of the rotation that has been underway in domestic equities. Value outperformed growth by a wide
margin in all cap sizes and is well ahead for the year.
· Small cap value is the best performing segment of the market year to date, up 3.11% in May and 27.5% in 2021.
· International equities outperformed U.S. equities, aided by the currency tailwind. Europe outpaced Japan, and in emerging
markets, Latin America was up more than 8% in May.
Real Assets
· Real assets continue to perform well as inflation concerns persist.
· Commodities outperformed REITS in May, but 2021 returns are very similar.
· Pipeline MLPs continue to rebound with stronger energy prices and greater demand. The Alerian MLP index was up 7.5%
in May and 41% year to date.
5One North Brentwood Boulevard, Suite 850
St. Louis, Missouri 63105
TF (855) 382-1600
www.benjaminfedwards.com
May 31, 2021 MTD QTD YTD 1-Year 3-Year 5-Year 10-Year
Fixed Income Indices
Barclays U.S. Treasury Bill 1-3 Month 0.00% 0.00% 0.02% 0.09% 1.32% 1.11% 0.58%
Barclays Municipal 0.30% 1.14% 0.78% 4.74% 5.03% 3.52% 4.29%
BBgBarc U.S. Govt/Credit Intermediate 0.12% 0.20% 0.16% 0.80% 3.01% 2.03% 1.51%
Barclays U.S. Aggregate 0.33% 1.12% -2.29% -0.40% 5.06% 3.25% 3.29%
Barclays U.S. High Yield 0.30% 1.39% 2.25% 14.96% 7.11% 7.39% 6.41%
S&P/LSTA Leveraged Loan 0.58% 1.10% 2.90% 12.51% 4.30% 4.91% 4.31%
Barclays Global Aggregate 0.94% 2.21% -2.35% 4.47% 4.38% 3.11% 2.15%
JPM GBI EM Global Diversified 2.50% 4.81% -2.19% 8.39% 3.54% 4.69% 0.64%
U.S. Equity Indices
DJ Industrial Average 2.21% 5.06% 13.76% 38.79% 14.82% 16.88% 13.37%
S&P 500 0.70% 6.07% 12.62% 40.32% 18.00% 17.16% 14.38%
NASDAQ Composite (Price) -1.53% 3.79% 6.68% 44.88% 22.70% 22.68% 17.10%
Russell 1000 0.47% 5.88% 12.14% 42.66% 18.43% 17.46% 14.41%
Russell 1000 Growth -1.38% 5.33% 6.32% 39.92% 23.02% 22.07% 16.98%
Russell 1000 Value 2.33% 6.43% 18.41% 44.38% 12.94% 12.33% 11.51%
Russell Mid Cap 0.80% 5.94% 14.56% 50.29% 16.15% 15.39% 12.83%
Russell 2500 0.21% 4.21% 15.60% 60.45% 15.06% 16.06% 12.48%
Russell 2000 0.21% 2.31% 15.30% 64.56% 13.06% 16.01% 11.86%
Russell 2000 Growth -2.86% -0.74% 4.10% 50.14% 14.48% 17.57% 12.76%
Russell 2000 Value 3.11% 5.20% 27.47% 79.38% 10.72% 13.83% 10.64%
Non-U.S. Equity Indices
MSCI World 1.50% 6.27% 11.62% 41.28% 15.00% 14.85% 10.92%
MSCI ACWI 1.61% 6.09% 11.06% 42.48% 14.43% 14.77% 10.16%
MSCI ACWI Ex-U.S. 3.20% 6.30% 10.12% 43.39% 9.42% 11.39% 5.84%
MSCI EAFE 3.36% 6.55% 10.39% 39.02% 8.73% 10.29% 6.37%
MSCI EAFE Growth 3.09% 7.52% 7.00% 35.59% 12.39% 12.47% 7.98%
MSCI EAFE Value 3.58% 5.65% 13.68% 42.32% 4.74% 7.84% 4.59%
MSCI Europe 4.31% 9.19% 13.79% 43.30% 9.53% 10.28% 6.14%
MSCI Japan 1.57% 0.02% 1.73% 25.60% 6.82% 10.09% 7.66%
MSCI AC Asia 1.36% 2.41% 4.84% 41.27% 9.36% 13.24% 7.50%
MSCI EAFE Small Cap 2.06% 6.22% 11.10% 45.85% 8.70% 11.60% 8.75%
MSCI ACWI Ex-U.S. Small Cap 2.37% 7.12% 13.13% 53.34% 9.41% 11.86% 7.24%
MSCI Emerging Markets 2.34% 4.90% 7.36% 51.51% 10.05% 14.30% 4.47%
MSCI EM Asia 1.25% 3.70% 6.00% 53.02% 11.62% 16.28% 7.15%
MSCI China 0.78% 2.19% 1.75% 38.88% 8.53% 17.01% 7.51%
MSCI EM Eastern Europe 10.81% 12.59% 15.53% 34.48% 11.74% 14.51% 1.24%
MSCI EM Latin America 8.03% 12.05% 6.14% 48.89% 3.39% 7.99% -2.45%
MSCI EM Small Cap 2.54% 8.76% 17.15% 75.07% 9.36% 12.28% 4.41%
MSCI Frontier Markets 4.05% 11.24% 12.18% 37.56% 6.91% 8.34% 5.31%
Hedge Fund Indices
IQ Hedge Long/Short 1.93% 4.83% 4.98% 22.02% 8.04% 7.25% --
IQ Hedge Multi-Strategy 0.49% 1.42% 1.09% 10.15% 4.26% 4.03% 3.50%
Real Assets Indices
FTSE NAREIT Composite 0.80% 8.79% 18.04% 33.99% 11.99% 8.93% 9.44%
Alerian MLP 7.57% 15.26% 40.56% 43.63% -2.50% -1.06% 0.67%
Bloomberg Commodity 2.73% 11.25% 18.94% 46.22% 2.05% 2.85% -5.11%
S&P Global Infrastructure 0.56% 4.12% 7.24% 23.75% 6.90% 7.23% 6.29%
Other
Oil Price Brent Crude 3.08% 9.10% 33.82% 96.21% -3.69% 6.89% -5.09%
CBOE Market Volitility (VIX) -9.94% -13.61% -26.33% -39.08% 2.79% 3.39% 0.82%
Source: Morningstar
6One North Brentwood Boulevard, Suite 850
St. Louis, Missouri 63105
TF (855) 382-1600
www.benjaminfedwards.com
The information provided is based on internal and external sources that are considered reliable; however, the accuracy
of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter
discussed. Investing involves risk including the potential loss of principal. No investment strategy, including asset allocation and
diversification, can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee
of future results. Indexes are unmanaged and investors are not able to invest directly into any index. This information does not
constitute a solicitation or an offer to buy or sell any secruity mentioned.
2021-1487 Exp 06/30/2022 7You can also read
