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NEW DELHI: Cryptocurrencies can be a hedge against sharp movements in other asset classes, but the volatility they experience is a bit of a dampener. However, with central banks stepping into the crypto game, this is a space that needs to be watched closely, HDFC Bank said in a report.

In the report titled “Cryptocurrencies: Fad or Forever?", HDFC Bank’s treasury research team led by its chief economist Abheek Barua said that it is just a matter of time before Indian investors have legal access to crypto plays.

The report, from one of the biggest lenders in India, has come at a time when there is ambiguity over crypto regulations. While the Supreme Court in March last year had overturned the Reserve Bank of India's ban and allowed lenders to extend banking facilities for such transactions, the central bank recently informally asked banks to stay away from businesses dealing in cryptocurrencies.

Financial institutions such as ICICI Bank, Yes Bank and Paytm Payments Bank have severed ties with the crypto sector.

Meanwhile, the Indian government is in the process of formulating a bill on cryptocurrencies.

Moreover, in terms of portfolio diversification, the HDFC Bank report was hopeful that like gold, bitcoin can evolve into a major asset class. “We find a positive correlation between gold and Bitcoin’s daily returns. Though the correlation was weak to start with but it has been rising… from a portfolio diversification perspective it has the properties of being a good hedge," the report added.

However, the report warned that a strong correlation between bitcoin prices and google searches indicates that it is perhaps more of a fad.

It also raised concerns over often-conflicting properties of cryptocurrencies. “Yes, they help to hedge against sharp movements in other asset classes but its own volatility that seems to be driven primarily by transient bouts of intense interest is a bit of a dampener."

A key positive highlighted in the report was an increasing appetite for cryptocurrencies as gauged by number of addresses with non-zero balance. “This might suggest that the digital tokens are here to stay and are not going away in a hurry."

A bitcoin address indicates the source or destination of a bitcoin payment. The number of bitcoin addresses with non-zero balance stood at 33 million as of December 2020 compared with 3.9 million addresses in 2014.

Moreover, Bitcoin has been one of the best performing asset classes over the past few years with a return of 10,869% since 2015 against 102% of S&P, 184% of Nasdaq and 59% of gold.

On benefits of digital currencies issued by central banks, HDFC Bank said they reduce the cost of managing and transferring cash, help in financial inclusion and improve cross border payments efficiency. “Additionally, central bank digital currencies (CBDCs) could speed the delivery of directed stimulus (helicopter money) to support the economy during a crisis/economic stress, thereby creating upward pressure on prices," the report added.

In India, the RBI has indicated that it is ‘very much in game’ and is working on launching its own CBDC.

Have any queries related to cryptocurrencies? Send in your queries at mintmoney@livemint.com and get them answered by industry experts.

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