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A Letter from the Stash Investment Team: Adding Crypto to Smart Portfolios

Today Stash is excited to introduce Smart Portfolio with cryptocurrency exposure, an essential part of a future-proofed portfolio.

Stash was founded to empower everyday Americans to build wealth. That’s why, since day one, we’ve committed to being a registered investment advisor. We serve our customers’ best interests, not only because we are required to by law, but because it is ingrained in our culture. And while we exist in a world with many digital platforms serving retail investors, this important distinction as a fiduciary is central to our mission and it informs how we’ve built our platform and serve our customers. 

As the Stash Investment Team, we are proud of the trust that our millions of customers put in us to help them build wealth for the long-term, and we make every effort to ensure our customers use our platform to help them achieve their financial goals. It’s in that spirit that we write this letter. 

A quick look back 

To date, Stash has served more than six million people with affordable and accessible tools for banking and investing. It all started with our Invest platform, where customers make their own selections among thousands of vetted and approved stocks and ETFs wrapped in Stash guidance and advice. This remains the most popular product on our platform.

As we grew, we learned that many subscribers were also interested in a fully-managed, set-it-and-forget-it investment portfolio. That’s why we launched Smart Portfolios last year. It’s intended to be a core investment tool, meaning that it should be the center of a customers’ long-term investment strategy. Today, it is our fastest-growing product with nearly 400,000 open accounts. And as we just announced, Smart Portfolios now include cryptocurrency exposure via handpicked trusts managed by Grayscale.

This was an important change in Smart Portfolios, at a time where we’re seeing significant interest in crypto among retail investors generally and our customer base. While the investment case may feel technical to some, we believe our subscribers deserve and can benefit from understanding why we introduced crypto and how we adjusted our customers’ portfolios to accommodate this change.

We hope this transparency gives you, our customers, an even deeper understanding of how we manage our Smart Portfolios, and why we believe cryptocurrency exposure is an essential part of a future-proofed portfolio for every American.  

The Why: A Stash Investment Thesis

Our deeply studied decision to add cryptocurrency exposure reflects our focus on doing what’s best for our customers as well as our outlook on the digital asset space powered by blockchain technology. While these technologies are relatively new, the market is maturing rapidly and has emerged as a compelling part of the global investment opportunity set, with trillions in total value. In evaluating the broader digital asset landscape—which includes coins, specialized tokens, NFTs and other financial innovations utilizing blockchain technology—we concluded that select large-cap cryptocurrencies were the right choice for our Smart Portfolios.

While many believe strongly in the transformative technological power of blockchain and the related investment outlook for cryptoassets, this belief alone isn’t enough to justify investing customer dollars in those assets. As the Stash Investment team, we needed a high level of confidence that cryptocurrency lends itself to robust, meaningful portfolio research, and also to confirm our belief that cryptocurrency will be uniquely additive to the portfolios, enabling timely new diversification effects and providing differentiated growth potential. 

Of course, we have studied Bitcoin’s and Ethereum’s volatile price histories and we note the lack of data on this asset class across market cycles and the lack of available insight on long-term cross-asset correlations. However, we believe that as adoption increases and key parts of the digital economy are realized, the drivers and patterns of volatility will become more clear and stable over time. The greater the investment in and actual use of digital assets by both institutions and individuals, the better we can understand and judge exposure to key performance drivers. Case in point, thanks to better visibility on cryptocurrency trading, it’s becoming easier to understand why and when correlations rise between larger cryptocurrencies and equity markets. These insights help shape our sense of how to build cryptocurrency exposure into an otherwise traditional allocation model and portfolio. 

Why now? 

With this change, we are both adding cryptocurrency trust exposure and reducing fixed income ETF exposure. The long-time lynchpin of standard diversification approaches, the US stock/bond correlation has reversed towards the positive in recent months and we face inflationary pressures and rising rates. Given these factors, the traditional strategy of utilizing fixed income as the portfolio ballast and risk-asset diversifier seemed inadequate. Our decision to reduce diversified bond ETF holdings is consistent with our view that the asset class is poised to struggle against inflation as well as the reality of exiting a rock-bottom interest rate regime. With stock/ bond correlations shifting and inflation and rate hikes poised to contain fixed income total return in the near-term, the hedging potential of cryptocurrency is a compelling means to manage risk in our Smart Portfolios.

We acknowledge a common criticism of this position: There is no historical evidence that cryptocurrency hedges inflation or bears a consistent performance relationship to gold (a conventionally accepted inflation hedge). That said, cryptocurrencies have existed only during the post-Crisis period in which policy rates have been at historic lows (and globally, even negative on an inflation-adjusted basis) and inflation/ inflation volatility have also been near historical lows. Thus the emergent market situation is the first opportunity to observe and affirm the efficacy of cryptocurrency’s unique capacity to combat these pressures. Given our belief that continued adoption is likely to drive material upside in the near- and intermediate-term parts of this cycle, we concluded that introducing modest cryptocurrency exposure is of greater benefit to our customers than waiting to analyze the performance of crypto as an inflation hedge. 

Asset selection and portfolio construction decisions 

We are dedicated to maintaining a deep and dynamic research perspective on the evolving crypto asset space. Our current process first studies assets’ protocol or design, and then we develop an outlook on what may be best-positioned to support portfolio performance across cycles. . Earlier this year, we determined the time was right to add crypto trust sleeves to Smart Portfolios, sized per the target risk level of each client’s Smart Portfolio. 

Here’s more on how we came to that determination: during this market cycle, we believe Bitcoin could realize its potential as a store-of-value asset—meaning it is regarded as having inherent value, like a digital analog to gold. Ethereum, on the other hand, is central to the development of a large part of the emerging decentralized digital economy, and as such, we expect increasing appreciation driven by deepening adoption. We also currently prefer Bitcoin and Ethereum given they are supported by mature markets, exhibit strong overall liquidity, and offer the most data for portfolio analysis. As described above, Bitcoin and Ethereum offer impactful exposure to two distinct arcs in cryptocurrency markets. 

Lastly, we have chosen to implement these exposures via trust because they offer economical and operationally-streamlined exposure within the Smart Portfolio framework. Grayscale stands out as a pioneer in digital asset management, and the company’s approach to research, regulatory posture, and client service aligns well with Stash’s mission. 

In closing 

The digital asset market has emerged and developed with a velocity that is remarkable and, of course, also invites skepticism about its stability and long-term future. But modern capital markets are enabled and driven by technologies that were unthinkable not long ago. Every day, we see enterprises and investors accepting this reality and working to keep pace with it. In our view, this crucial reality is what tipped our investment thesis beyond intuitive-but-theoretical, and brought it into the scope of rational and in the best interest of our Smart Portfolio customers. 

The Stash Investment Team is dedicated to ensuring that Stash subscribers benefit from a diversified portfolio built to thrive. We are proud and honored to continue to guide Stash’s customers to long-term investment solutions and ultimately, their creation of wealth. 

This material is not intended as investment, tax or legal advice. This information is for educational purposes only.

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