Wednesday, November 24, 2021

Will Goh Keng Swee buy Cryptocurrencies for Singapore ?


I thought that after doing up my article on investing like GIC (link), this blog should have a discussion on more advanced topics that cannot be answered even with access to advanced data, so it falls to my blog readers to speculate on possible answers.

Goh Keng Swee's contribution to Singapore as a founding father is uniquely consequential. He made decisions that were counter-intuitive for its time such as employing exchange rate controls to prevent inflation and keeping the nation competitive instead of managing interest rates as central banks in other countries. He was one of the earliest politicians to recognize that investing in equities can lead to higher returns. He was also very much of a "buccaneer", buying 100 tons of gold at $40 an ounce through a secretive private deal in 1968. 

So the question I have for everyone is: Will Goh Keng Swee buy Cryptocurrencies for Singapore?

Imagine if Goh Keng Swee is still around and in his prime. He has powers of influence over GIC, Temasek, and MAS. 

Would he include cryptocurrency in Singapore's asset allocation?

The answer may need to be answered in multiple parts :

a) Should Singapore include cryptocurrency in short-term foreign reserves under MAS?

MAS tries to keep the Singapore dollar within two boundaries. If SGD becomes too strong, MAS will sell SGD for more foreign currencies. If SGD becomes too weak, we will buy back SGD using our foreign reserves. This was we can either control inflation or make our exports more competitive. 

Will these reserves benefit from a small allocation to bitcoins? 

My knowledge is quite shallow. In my opinion, there is currently no need to do so because we don't do actual business in SGDBTC. If a major trading partner makes Bitcoin legal tender, this cannot be discounted. 

b) Should GIC's policy portfolio include cryptocurrency?   

To meet GIC's long-term objectives, a team will determine what asset classes it can deal in. GIC was an early adopter of private equity so I don't see what impediments there will be to prevent cryptocurrency to be added to the mix. I would expect that if GIC were to do so, positions would be very small and diversified across many other cryptocurrencies. 

There will be a lot of impediments to making this a reality. Financial experts need to contend with new forms of risk ( like smart contract risk or oracles getting manipulated by hackers ).

One area that possibly needs to be addressed is volatility drag. The calculation for Geometric mean returns is not just the arithmetic mean returns. We have to deduct half the variance from average returns to get actual geometric mean returns.

GBTC returns (on Portfolio Visualizer) over the past 3 years are an annualized 66.39% with a standard deviation of 82.21%. The actual geometric return you will experience over time is 0.6639 - (0.8221^2) / 2 or 32.6%. 

It's still not too bad, but not as hyped up as many investors make it out to be.   

I suspect Goh Keng Swee will jump right in since GIC's time horizon is really long and no one will really know how much GIC really has. 

Anyway, readers are free to share given what you know about our history, what your answer would be.


1 comment:

  1. Pretty sure Temasek & GIC have already invested some reserves into a bunch of crypto-related businesses. Binance has been knocking on the doors of SWFs, trying to gain bona fide with govts.

    As for exchange rate control, probably too volatile currently. It'll be like trying to drive a school bus full of kids with an F1 engine that has tendency to explode at various times.