SCX | Crypto Insights #5
Why Bitcoin belongs in every portfolio
Bitcoin should comprise a minimum of 2 percent of your portfolio just for diversification purposes.
Bitcoin is perceived and also used more as a store of value than a means of payment. Often described as digital gold one should consider holding Bitcoin in a portfolio and include it when developing the strategic asset allocation. Although Bitcoin is very well known as an alternative asset class not many portfolio manager and institutions think about investing in Bitcoin yet. This has many reasons. There have been uncertain regulatory environments in many countries. It has also been rather difficult to buy large amounts of Bitcoin with FIAT money and certainly not as seamless as buying stocks, bonds or gold. But such issues are gradually being solved, so it is time to start thinking about Bitcoin as a portfolio addition.
Correlation matrix 2016–2019
Bitcoin’s low correlation to other asset classes (see chart above) means that it can significantly improve the risk-adjusted return profile of a portfolio. In times of high valuations in stocks and bonds and considering that we are rather at the end of a bull run than at the beginning, this is important. It means that in times of large sell-offs or bear markets in traditional assets, Bitcoin has portfolio protection characteristics. According to the Yale Study of Yukun Liu and Aleh Tsyvinski, titled “Risks and Returns of Cryptocurrencies”, for an optimal construction of one’s portfolio, the economists hold that Bitcoin should account for at least 6 percent of it. Those who are less enthusiastic about the world’s most popular cryptocurrency should hold 4 percent of it.
Bitcoin also has a very attractive risk/return profile on a stand-alone basis. As seen in the chart below, Bitcoin has a superior Sharpe Ratio compared to major asset classes. This means that over time one receives good investment returns even taking into account the massive volatility of Bitcoin.
Sharpe Ratio of different assets 2012–2019
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