Do Cryptocurrencies Belong in Institutional Portfolios?DoCryptocurrenciesBelonginInstitutionalPortfolios?

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  >> Now an estimated half a trillion dollars has been wiped from the value of the global cryptocurrency market this month [inaudible] line in the so-called stablecoin TerraUSD. It has reignited the debate over the future of crypto at a time when exchanges, banks, and institutional investors have started to become more interested in it as an asset class. Well, my next guest, though, argues that cryptocurrencies offer few meaningful opportunities for institutional investors. Taimur Hyat is the Chief Operating Officer at the global investment management firm PGIM. Taimur, welcome to you. Why do you say this?

  >> Good morning, Ian. Basically, we looked at the data. We try to torture it as much as possible to see if there was a case for cryptocurrency for long-term institutional investors. And while I think the first seven years of Bitcoin were momentous, when you look at it as a teenager now, by the way 2009 when the first Bitcoin transaction happened -- for the last four, five years, Ian, the data just shows that it no longer acts as a diversifier to equities or bonds. It's not a safe haven. It actually created during the Ukraine war and it hasn't done well against the current bout of inflation, 9% in the UK that we're seeing. It doesn't have a stable relationship with other asset classes. It has terrible ESG characteristics, not just on the environmental side but also on the governance side. And it's risk return recently hasn't looked that much better since the pandemic versus many other asset classes. So the data just doesn't allow us to see a reason institutional investors should be in cryptocurrencies.

  >> And one of the main cases made for cryptos like Bitcoin is it is a reliable store of value. You're arguing that's not the case?

  >> I think it doesn't fulfill any of the functions of a currency, one of which is to be a reliable store of value. I mean, you could go with your Bitcoin, Ian one day and pay three times a higher amount for a cup of coffee, so it hasn't really worked yet as a store of value. It really hasn't worked yet as a broad medium of exchange. We don't think it's going to replace fiat currencies like the sterling or the euro. In fact, we think those currencies will learn from Bitcoin and the innovation system around it. And central bank digital currencies, the digital euro, the digital [inaudible] will actually become quite important but not cryptocurrencies themselves. And I think the final headwind there is the regulatory environment is really unsettled. There are lots of headwinds. The recent stablecoin example you cited will worsen those headwinds, and I think institutional investors are looking for stability and clarity in the regulatory framework before they jump in at any scale.

  >> Supporters of crypto would say -- well, it does actually display a lot of the characteristics of a store of value. I mean, it's limited supply, it's fungible, it's transferable.

  >> I think when something loses 35% of its value since its peak, as we've seen recently, for no apparent reason, it's quite hard to make that claim when you take a cold, hard look at the data, Ian. But what I would say to the crypto enthusiast is that we actually, at PGIM, across our 1.5 trillion of assets see a [inaudible] opportunity in the broader crypto ecosystem. So that sort of implicit innovation that happened in the blockchain creates a range of investment opportunities that we think are quite attractive for long-term investors.

  >> Absolutely. We'll get on to that in a moment. I just want to press this point though on Bitcoin and other crypto being an inflation hedge. It's worth pointing out that since the 21st of January, which is when a lot of turbulence started to materialize, Bitcoin has actually marginally outperformed gold.

  >> It has but I think there are two other things to look at as well. One, that only recent bout of inflation we've had in the G8 has been over the last year-and-a-half or so and Bitcoin has actually lost value over that period. And second, if you look at the 10 year period, gold shows much more stability than Bitcoin has. And if you want an inflation hedge, I think some of the classic hedges that have been intrinsic, economic reason to act as a hedge, real estate would be a good example or even gold that has intrinsic value because 50% of it is used for industrial uses and jewelry, it's still held by monetary authorities, I think has a better underlying economic case than Bitcoin which really -- where is inflation now? 9% in the UK, over 7% in the US. Look where the cryptocurrencies are. They really haven't held their own.

  >> But just to go back to something that you said a moment ago, you aren't saying that there's no value in some of the technology in the crypto ecosystem, distributed ledger technology for example.

  >> We actually believe there's lots more value. It's like during the gold rush. It wasn't -- value wasn't ultimately people who held gold for long period. This was in shovels and picks. So we can blockchain [inaudible] and specifically the real-world use-cases. Investors shouldn't get caught up in some of the sort of fantasy use-cases but the real-world use-cases. I would say, Ian, the strongest ones are in permission blockchains, private block chains, and financial services. They're going to be quite revolutionary in supply chains and logistics. There are real opportunities in smart contracts that make escrow and repo markets much more effective and quick and cheaper. They're real opportunities in tokenization, so securitization of real estate and infrastructure in a way that many more retail and broadly more diversified investors can come in. And I do think that part of the meta-verse -- I mean it is 500 billion in revenue now in e-gaming and e-sports and advertising. There are opportunities there. There are lots of losers, lots of pitfalls, but there absolutely are opportunities and investors should keep a close eye on the broader meta-verse but not in NFTs and for institutional long-term investors, not in cryptocurrencies.

  >> All right, Taimur. We have to leave it there. Always enjoy having you on the program and I'm going to get a proper intellectual discussion. Good to see you again. Thank you.

  >> Thank you.