Bitcoin diversification benefits

For a while now I’ve been seeing the crypto community encouraging people and institutions to #getoffzero. However, I recently saw a research note from Macquarie Bank and some charts from PlanB that help quantify the benefit of holding bitcoin in a diversified portfolio and thought I would add my two cents.

The first graph, originally posted by Pantera Capital, shows that historically bitcoin is almost entirely uncorrelated with any of the traditional investments found in a diversified portfolio. The average correlation for the bitcoin price to other asset classes is 0.08 (0 would indicate no correlation and 1 would be perfectly correlated). This means that the price movements of bitcoin are unrelated to the movements of the other assets — this is important because you don’t want your investments to be moving in tandem during a market crash!

The next graph, plots the Sharpe ratio of several different asset classes alongside bitcoin created by Willy Woo. The Sharpe ratio is a measure of risk adjusted returns, or put another way, how much return you are getting for the risk you are taking. Historically bitcoin has outperformed all other asset classes, which was better than I expected given bitcoin has regularly delivered annualised volatility in excess of 100% (remembering we recently had ~+40% in a day!?). What may be even more interesting, would be to calculate the Sortino ratio, which is similar but only considers the downside volatility — looking at you Willy Woo

Putting together the outstanding properties of bitcoin as an asset class — Macquarie Bank recently published a research article that calculated the benefit of holding bitcoin in a diversified portfolio.

The conclusion was that putting Bitcoin into a portfolio showed some very good headline numbers — but held the caveat that obviously timing was crucial and that the past performance doesn’t guarantee such attractive risk-adjusted returns in the future.

But Macquarie aren’t the only ones pushing the Bitcoin agenda in the wealth management space. Canaccord Genuity have a series entitled “Blockchain & Digital Assets”. Apart from discussing the halving event, miner dynamics, ownership and supply (for further on this see my earlier article https://medium.com/@mrjamesmanning/bitcoin-price-movements-a-reflection-on-the-last-12-months-and-whats-ahead-909c683e122e ), they are highly focused on the correlations.

In summary they conclude:

Bitcoin’s most compelling case for institutional investors may be as an uncorrelated asset to stocks, bonds, gold and oil, as bitcoin continues to demonstrate low correlation to other asset classes.

So perhaps you don’t get the underlying use case for Bitcoin, maybe you don’t believe in the store of value argument or Bitcoin’s ability to transfer funds instantly without large fees… but perhaps you just need to consider the diversification benefit.

In my opinion, there is plenty of justification to #getoffzero.

About Cosmos Energy: Cosmos Energy Group (Cosmos) is an Australian based digital asset infrastructure business. We are focused on the identification, acquisition and use of stranded or distressed energy assets, through co-location of flexible data centres. Cosmos currently deploys ASIC hardware primarily focused on Bitcoin mining in these data centres throughout the USA.

About James Manning: James Manning is the Founder of Cosmos Energy Group. Based in Sydney, Australia he is has a background in accounting and finance. When he isn’t busy mining for Bitcoin, James is searching for value adding opportunities in emerging technology.

We’re building a bridge between the emerging sector of Digital Asset Infrastructure and traditional capital markets. https://cosmoscapital.io/

We’re building a bridge between the emerging sector of Digital Asset Infrastructure and traditional capital markets. https://cosmoscapital.io/