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Bitcoin prices have crashed, but the case for portfolio diversification with crypto has not.
Dreamstime
Bitcoins
crash this year – a decline of more than 70% since its all-time high in November 2021 – may have curious investors looking to stay far away from crypto. But analysts say digital assets continue to be a genuine way to diversify a portfolio.
Adding Bitcoin and other digital assets can actually reduce overall portfolio risk through diversification, Benson Durham and Roberto Perli, analysts at
Piper Sandler
,
wrote in a note Wednesday.
This may come as a surprise considering the state of the crypto market, which was worth nearly $3 trillion 10 months ago and has since fallen to a market cap of less than $1 trillion.
Although shocks in crypto itself are partly to blame, the selloff in digital assets has come in tandem with a bear market for stocks, with
S&P 500
and especially the technological share-heavy one
Nasdaq
fall this year. Investors have shifted away from high-growth, riskier plays like Bitcoin and technology stocks this year amid red-hot inflation and a tightening of economic conditions by the Federal Reserve.
Years ago, crypto traded largely independently of mainstream finance, but a resurgence in popularity since 2020 and the influx of both private, professional and institutional investors has helped Bitcoin become correlated with risk-sensitive assets such as stocks. When stocks have fallen in 2022, cryptos have typically plunged.
In fact, the correlation between Bitcoin and U.S. stocks is about as high as it’s ever been, Durham and Perli said — and that lends weight to the investment thesis that Bitcoin can act as a good portfolio hedge.
But looking past crypto’s role in hedging a portfolio, the team at Piper Sandler sees Bitcoin’s volatility relative to the S&P 500 falling significantly since 2019. That even accounts for this year’s wipeout, which has seen eye-popping losses and gut-wrenching price swings .
“This trend may be consistent with Bitcoin ‘maturing’ as an asset class, perhaps with a growing stable, buy-and-hold-for-longer investor base,” Durham and Perli said.
“On balance through this latest Bitcoin drawdown, the case for diversification seems neither more nor less compelling than before,” the analysts added. “Adding other risky assets can reduce overall portfolio risk significantly, by about half from yesterday in fact.”
Of course, none of this has any bearing on expected returns from Bitcoin, the team at Piper Sandler noted, adding that investors cannot escape worst-case scenarios and that bubbles and general speculation remain a concern for the space.
Write to Jack Denton at [email protected]
