Portfolio diversification
Amongst the list of disruptive innovations of the century, Bitcoin has been the most impactful one. This emerging digital asset has revolutionized money, payments and transfer of assets. Its strong selling point lies in the fact that it transfers value in a secure way via a distributed and decentralized network. Owing to the increase in its adoption, Bitcoin stands as the best performing asset and currency of 2015. Portfolio diversification is turning out to be another key use of Bitcoin.
Last Year witnessed many macroeconomic issues that hit the global economy hard. During this phase heavy funds have flown into the Bitcoin market when most assets plummeted under speculation. While this was supposed to be a short term boost, the crypto-currency continued to rise with higher trading volumes. This new found confidence in Bitcoin is due to factors which also make it an effective tool for portfolio diversification. Let us look into these factors in detail:
Bitcoin is non-correlated asset
Source: Pantera Capital
The ideal characteristic of a portfolio is that every component should be non-related. When one asset takes a hit, the other components should be chosen such that the losses are minimized. Additionally, these components should be able to provide potential to improve returns for that level of risk. Most of the asset classes are related owing to some or the other fundamental factors. But over the past year, with so many tumultuous events, while most asset classes were dislocated, Bitcoin was unaffected. This is majorly because Bitcoin has very little or no correlation with any of the other asset classes. In comparison with fiat currencies and other assets around the world, Bitcoin had very little correlation (<0.3). Hence we believe that bitcoin could do well as a diversifier in a globally allocated portfolio.
Reduction in volatility levels
2015 saw tectonic shifts in the Bitcoin ecosystem with heavy investments till date. This included global banks, credit card issuers and hedge funds. As Bitcoin gains further acceptance and the underlying technology is adopted furthermore, we can see stability in the price levels. The recent reduced volatility levels are the testament to the fact that adoption has positive influence. As further applications of the currency and technology are found, we can see volatility on par with stable currencies. The three month average volatility for Bitcoin has been around 2% which is far better than devalued currencies of 2015.
Owing to these factors, we can see that Bitcoin serves as a really good portfolio diversifier. With growing adoption and more stability in prices, it is sure to be a major component of portfolios to come.
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