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In backtesting, the ETP is reported to have been less volatile than eight of the 10 largest stocks in the U.S. over the past five years, beaten only by Berkshire Hathaway and Johnson & Johnson.OZAN KOSE/AFP/Getty Images

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The first exchange-traded product (ETP) to combine gold and bitcoin in a single fund has launched on the SIX Swiss Exchange.

The fund combines a millennia-old store of value with an upstart security that some have touted as the “new digital gold” – even if bitcoin’s slide in recent months has tarnished any reputation it may have had as a haven in troubled or inflationary times.

“We are making bitcoin an acceptable asset to hold and bringing gold into the 21st century,” says Charlie Morris, chief investment officer of ByteTree Asset Management Ltd., which is behind the 21Shares ByteTree Bold Index ETP that has listed with the ticker BOLD. A German listing is expected to follow later.

While gold ETPs and spot bitcoin ETPs are both widely available independently – in continental Europe, at least – Mr. Morris claims that ByteTree’s active rebalancing strategy had improved returns by 7 to 8 percentage points a year in backtesting.

The fund will rebalance monthly based on 360-day historical volatility, with the less volatile asset having a higher weighting in an attempt to maximize risk-weighted returns. In reality, that means gold tends to dominate the portfolio, with a weighting of between 70 and 90 per cent in backtesting stretching back to 2016.

“It struck me that bitcoin and gold were always countercyclical. It’s obvious to me that bitcoin has always been correlated to the stock market, or to risk assets in general,” says Mr. Morris, who until 2015 was head of absolute return at HSBC Holdings PLC, at which he managed more than US$3-billion.

With the traditional balanced portfolio of 60 per cent equities and 40 per cent bonds struggling this year as both asset classes have sold off simultaneously, Mr. Morris says 60/40 works in a deflationary period. In an inflationary one, 21Shares ByteTree Bold Index ETP is 60/40 in the sense that it’s balancing a risk-on asset with a risk-off asset.

Mr. Morris claims that the ETP had been less volatile in backtesting than eight of the 10 largest stocks in the U.S. over the past five years, beaten only by Berkshire Hathaway Inc. BRK-B-N and Johnson & Johnson Inc. JNJ-N.

Going back to 2014, its biggest calendar-year loss would’ve been 12.7 per cent in 2018, a year bitcoin slumped 73.8 per cent.

The ETP would’ve returned a cumulative 363 per cent over the full 2014-21 period compared to 3,816 per cent for bitcoin, 58 per cent for gold, 134 per cent for the S&P 500 and 82 per cent for U.S. Treasury inflation-protected securities.

Annual fees will be 1.49 per cent, high for an ETP, in general, but not particularly so for a crypto product. Mr. Morris says costs were pushed up by the difficulty of finding a custodian able and willing to handle both physical gold and bitcoin. ByteTree ended up having to split custodianship between J.P. Morgan Chase & Co. (for gold) and Copper.co (bitcoin).

“Never before in history has an ETP had two independent custodians,” Mr. Morris says. “No one from the old world has any clue what to do with bitcoin.”

The portfolio is reminiscent of that described by Ray Dalio, founder of hedge fund group Bridgewater Associates LP, when asked whether he would choose dollars, gold or bitcoin to put under his bed for a rainy day. I would take the gold ... [and] I would like to sprinkle a little bit of bitcoin into that mix, too,” he replied.

Some think 21Shares ByteTree Bold Index ETP will have a broad market appeal.

“Investors often think of bitcoin as an alternative investment to gold and other commodities, so to have a fund that’s going to own both is compelling,” says Todd Rosenbluth, head of research at ETF Trends.

He believes retail investors could benefit from having the respective weightings dynamically readjusted automatically, without having to do it themselves.

Not everyone was convinced of the fund’s merits, though.

Kenneth Lamont, senior fund analyst for passive strategies at Morningstar Inc., says the key question was for which purpose is someone investing in these assets.

“In terms of gold, you can say it’s volatile but usually it’s volatile when you want it to be. You want it to spike in times of crisis,” Mr. Lamont says.

“But does anybody think that gold is going to go up indefinitely? Probably not. It’s an asset that you hold in your portfolio as ballast, as downside protection. It doesn’t pay any dividends, much like bitcoin. You are not holding it for its lack of volatility through time.”

As for the cryptocurrency side of the ledger, Mr. Lamont says, “if you don’t want the volatility of bitcoin, then maybe you shouldn’t be involved in bitcoin. In some sense, you are buying it for its volatility.”

“With these asset classes, volatility is not necessarily the enemy,” he says, adding “I’m not sure this is a sensible approach.”

Mr. Lamont also doubts the potential longevity of this ETP.

“Ultimately, these very niche funds don’t tend to survive. They’re perhaps overly complicated and the fees will clearly be a big part of this,” he adds.

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