The crypto market has seen a rejuvenating trend recently, with the declining correlation between bitcoin (BTC) and equities. Market research firm K33 noted in a report that this change makes a strong case for including BTC in a diversified portfolio. The 30-day price correlation of BTC with the NASDAQ index fell to 0.26, its lowest level since December 2021, while its correlation with the S&P 500 index also saw a significant drop last month.
Over the years, Bitcoin has attracted investors as an asset with a price independent of other investment classes, particularly equities. This attribute makes it an appealing addition to diversified portfolios. However, this narrative changed in the past year when digital asset markets experienced sharp declines in sync with stock markets. This increased correlation between cryptocurrencies and traditional markets resulted from central banks worldwide hiking interest rates at an unprecedented rate to tackle soaring inflation. As a result, rate-sensitive, high-risk assets such as stocks and cryptocurrencies experienced a decrease in their prices.
K33 attributes the previous high correlations to an excessive focus on growth and a widespread mania across financial markets. With conditions now stabilizing, there is an increased possibility of BTC resuming its role as a reliable diversifier in investment portfolios. Research from K33 demonstrates that even a small allocation to BTC can enhance the performance of traditional portfolios.
A portfolio comprising 3% weight in BTC, 58.5% in stocks, and 38.5% in bonds has outperformed the classic 60% equities, 40% bonds investment strategy over time. Interestingly, this holds true even when measured from January 2018, around the time when cryptocurrency prices entered a two-year bear market. In such a scenario, a portfolio with BTC inclusion would have outperformed by 6.9%.
While considerable price fluctuations in BTC may deter investors, the K33 report highlights that a disciplined rebalancing strategy, along with a minor allocation to BTC, can effectively improve the overall risk profile of a traditional portfolio. This development showcases the potential benefits of embracing cryptocurrencies as a viable component in diversified investment portfolios – a fact that an increasing number of investors are likely to recognize and capitalize on in the future.
Source: Coindesk
