The antagonism between the U.S. Securities and Exchange Commission and prospective issuers of bitcoin (BTC) spot ETFs is stealing the limelight in current cryptocurrency news circuit. A sanctioned bitcoin ETF would ramp up easy entry into the crypto space and could potentially kickstart a bullish turn of events in the crypto world.
However, investors who restrict their exposure to the significantly high concentration of mammoth-cap assets like bitcoin and ether, might not fully tap into the comprehensive value proposition of digital assets in their portfolios. This goes to underline the importance of expanding the digital landscape investment space beyond single, leading assets where diversification becomes crucial in the process.
It’s pertinent at this juncture to consider whether cryptocurrency provides long-haul diversification characteristics vis-a-vis traditional assets. Furthermore, mull over whether bitcoin alone is sufficient to capture these benefits thoroughly; or is there scope for allocating to other tokens. A glance at rolling correlations of the top 25 crypto assets could provide some insights on these lines.
Analysing rolling correlations of daily returns for the 25 largest crypto tokens to a U.S. 60/40 stock/bond portfolio over the trailing two-year period showcases the strength of diversification characteristics. Each digital asset maintained full-period correlations of less than 0.50 with traditional portfolios. In terms of the correlation of the full set of tokens to that of bitcoin, an improvement is evident, moving from 0.46 for only BTC to an average of 0.40 across all top 25 assets.
Crypto circuits and platforms, rejecting the worn-out stigma that “all crypto is the same,” have shown variations in correlations alongside modest overall levels. This validates their stand and emphasizes that exposure to the wide range of crypto sectors and basic blockchain use cases can enrich token diversification.
Crypto managers who concentrate on bitcoin alone face limitations such as only being able to time the market; an extraordinary challenge in any asset class. Vital components for successful value strategies include asset breadth and adequate differentiation among assets. A majority of the residual variation among these token pairs (approximately 90%) is unique, suggesting substantive differentiation for the exploitation of relative value strategies.
In essence, multi-asset crypto portfolios deliver superior diversification characteristics when pitted against single-token concentration. The portfolios also offer a broader scope and open doors for relative value active management opportunities; both across crypto sectors and within them. It’s all about capitalising on the numerous fundamental uses of blockchain technology rather than relying solely on giant players like Bitcoin and Ether to generate substantial returns.
Source: Coindesk
