The Benefits Of Increasing Your Portfolio Diversification With Crypto

Long-term investors often encourage three guiding principles: remain invested throughout the various stages of the economic cycle, contribute systematically to one's portfolio and be adequately diversified within one's portfolio, having exposure to different asset classes. While the first two principles speak to an investor's conviction and willingness to maintain these actions over a prolonged time frame, the latter speaks to an investor's outlook and how they believe an asset class will perform. 

For some investors, diversification is somewhat of an afterthought, resulting in them having exposure to only U.S. stocks and bonds and forfeiting all other investment offerings and the benefits they can provide. However, there are benefits to broad diversification, and exposure to an asset class such as cryptocurrencies can benefit long-term investors.  

Benefitting From A Little Bit Of Everything

Across the investment landscape, performance leadership and the degree to which one asset class outperforms the other changes every year. Instead of trying to guess and gauge which asset class will be the best, diversification encourages broad exposure to all of them. 

Multi-asset investing has gained prominence among investors as a means of navigating the complexities of today’s dynamic markets. Instead of concentrating investments on a single type of asset, such as stocks or bonds, multi-asset investing seeks to spread risk and enhance potential returns by including a mix of different asset types in a portfolio. These asset classes include equities, fixed-income securities, real estate, cryptocurrencies and other investment instruments.

The Case For Cryptocurrency Allocation Within A Portfolio

While U.S. equities’ 23% performance was strong last year, cryptocurrencies, namely Bitcoin, outperformed the S&P 500 Index by returning 156%. While Bitcoin’s exceptional returns may cause individuals to pause, it is fair to acknowledge that the asset class is relatively high-risk/high-return in nature. However, given the current market backdrop, there are multiple reasons one may want to consider a reasonable cryptocurrency allocation within one's portfolio.

The strong performance of U.S. equities in 2023 was driven primarily by the Magnificent Seven, the colloquial name for the mega-cap group of Apple AAPL, Microsoft MSFT, Amazon.com, Inc AMZN, NVIDIA NVDA, Alphabet, Inc GOOGL, Meta Platforms, Inc META and Telsa TSLA. With these companies now having an outsized influence on U.S. equity markets, investors in U.S. equities are susceptible to changes that occur with them. 

Conversely, Bitcoin and other crypto assets have delivered returns with a relatively low correlation to public equities. The fact that it has produced both high returns and low correlations means that Bitcoin (and other crypto-assets) can benefit a portfolio through higher returns and better diversification.

Against the backdrop of an uncertain macroeconomic and geopolitical landscape, the decentralized nature of Bitcoin and other cryptocurrencies has risen in appeal, as they seem to possess multiple ‘safe-haven' qualities that investors and savers ascribe value to during periods of elevated market risk.

Simply put, crypto assets broaden the spectrum of risk and return available to investors in public markets. In other words, for investors willing to take more risk, the crypto asset class can potentially deliver higher total returns in the form of liquid instruments that are widely available on exchanges.

How Much Is Appropriate To Hold?

Every individual's personal investment situation is different; as such, how much of a particular asset class they are exposed to will vary depending on their circumstances, such as age, experience, income level and risk tolerance. Because crypto is a high-risk/high-return-potential asset class with a low correlation to stocks, crypto assets can potentially help investors overcome some of the portfolio construction challenges they face today. A moderate allocation can have a material impact on their portfolio's performance.

Caleb & Brown, the crypto investor’s expert partner, provides a premium and personalized service for beginner and advanced investors alike, with Bitcoin and hundreds of other crypto assets readily available for one's portfolio.

A dedicated relationship manager is always on hand to guide you along the way, giving you the confidence you need to navigate the world of crypto.

Featured photo by Daniel Dan on Unsplash.

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