Note: This is the first in a series of papers published by Revoltura, sponsor of the BitcoinETI.
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Portfolio managers seeking alternative asset may consider the digital currency as a way to diversify their investments, to boost their performance and to improve their sharpe ratio.
Bitcoin - Portfolio Diversifier
Bitcoin has emerged as a new asset class that as its own specifics drivers independently to other assets.
Portfolio managers needs to build a well-diversified portfolio in order to reduce exposure and capture gain value.
Indeed, uncertainties of equities, bonds and commodity markets definitely plead for an allocation in bitcoin.
A report from Coinbase and ARK Investment Management shows that bitcoin is not correlated to any other assets classes. The table below summarizes the correlation coefficient of bitcoins prices performance compared to major asset classes and emerging countries’ forex.
Therefore, bitcoin appears as a very effective diversification leverage for sophisticated investors’ globally-allocated portfolios.
Bitcoin - Portfolio Return Driver
In a low-rate and slow-growth economy, an allocation to bitcoin is not only a way to mitigate risks of traditional capital markets but also a way to better overall portfolio returns.
Investors seeking alpha returns should consider an allocation to bitcoin, as the figure below shows that the digital currency offers unparalleled compound annual returns.
In a standard portfolio, investors having a large allocation to bonds and to equities, both domestic and foreign and a small allocation to cash, would have had negative returns over the last year.
In addition, Bitcoin is a non-inflationist currency, as its supply decreases over time and its total volume is limited to 21 million.
The digital currency main driver is China, as the Chinese exchanges capture about 90% of bitcoin trading volumes. Considering the slowdown of its economy, leading to several devaluations, interest rates cuts and capital controls measures, Chinese are more and more investing in bitcoin.
In that regards, the digital currency represents a unique solution to store value outside the Yuan zone and to invest abroad.
Hence, turning some assets allocations into a growth asset such as bitcoin should help enhancing portfolios’ performances.
Since the publication of the Coinbase and ARK Investment Management Report, bitcoin price has increased +50% from $450 to $680, still far from its all-time record of $1,200.
Bitcoin - Unparalleled Sharpe Ratio
While past performance is no guarantee of future results, with an outstanding performance and a decreasing volatility, bitcoin’s sharpe ratio has been outstanding.
While bitcoin still experiences large price swings, the magnitude of those swings has diminished resulting in decreased volatility.
The sharpe ratio is a common measure of risk-adjusted returns, which is the average return earned in excess of the risk-free rate per unit of volatility or total risk. Assets with the greater sharpe ratio are those that best compensate investors for their risk.
Bitcoin’s sharpe ratio has outperformed gold, oil and emerging market currencies on a risk adjusted basis over the past 5 years. While US Equities and US Real Estate have been underperforming, bitcoin has been a standout over the last 12 months.
Hence, investors might want to add bitcoin to their portfolios, not only for diversification purpose, but also to benefit from exceptional returns with an outstanding sharpe ratio.
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