Cryptocurrencies As Portfolio Diversification

AS BITCOIN and cryptocurrencies gain ever more media coverage, many who never invested in crypto are asking whether cryptocurrencies could provide meaningful portfolio diversification to traditional portfolio asset allocation. To answer this, one must look both backwards and forward. Backward looking to determine past correlations and a risk-reward profile, and forward looking to understand the real risk of central bank mistakes and government debasement of fiat currencies.

- Rainer Michael Preiss

To answer this, one must look both backwards and forward. Backward looking to determine past correlations and a risk-reward profile, and forward looking to understand the real risk of central bank mistakes and government debasement of fiat currencies.

Diversification—or portfolio insurance—focuses on the volatility of an underlying security, plus its correlation with core market assets, and how it impacts a portfolio’s risk-return characteristics over the longterm or during extreme macroeconomic or market stress. The main reasons for Bitcoin’s portfolio diversification are: investability, politico-economic features, returns correlation and risk-reward profile.

Research has shown that investors prefer outcomes with known probability distributions compared to those where probabilities are unknown. Bitcoin has insufficient data to regard it as a safe haven. However, for its risk-return profile, no other asset worldwide can match Bitcoin’s optionality.