Crypto for the traditional investor community

Crypto is a unique asset class. Since 2009, when the first cryptoasset, Bitcoin, was launched, this asset class has generated phenomenal returns for long-term investors. However, it has not always been a smooth ride. Along the way, cryptoassets have experienced high levels of volatility.

Cryptoassets have shown that they have many uses in the modern world. Today, there are literally thousands of innovative projects running in the crypto ecosystem. As corporations continue to adopt the technology, this ecosystem is likely to expand.

Does crypto have a place in the traditional investor’s portfolio today? The answer to this question seems to be yes, if research from major global financial institutions is anything to go by. A number of recent studies have shown that when a small amount of crypto is added to a traditional, balanced long-term portfolio, the portfolio’s overall risk/return profile is enhanced significantly, despite the cryptoassets’ inherent volatility.

Why crypto should be added to a long-term portfolio

From an investment perspective, there are several major benefits to owning cryptoassets. These include:

  • The potential for strong long-term returns. Just look at the performance of cryptoassets such as Bitcoin and Ethereum over the long run. Over the five-year period leading up to June 30th, 2021, for example, Bitcoin jumped from around $6801 to around $36,000, generating a return of over 5,000%, while Ethereum skyrocketed from $12.502 to $2,275, generating a return of over 18,000%. These are extraordinary returns, however, but any investor should remember that past performance is not an indicator of future returns.

  • Increased diversification. Cryptoassets generally have a low correlation to traditional assets such as stocks, bonds, real estate, and commodities. This means that crypto can potentially help diversify a long-term portfolio and lower overall risk. It is worth pointing out that, relative to traditional assets, cryptoassets offer investors something different. Take Bitcoin, for example. This asset is completely decentralised, meaning that it cannot be controlled by the world’s governments. In addition, it is relatively scarce as there are only 21 million Bitcoins that can be mined in total.

How an allocation to crypto can enhance a portfolio’s risk/return profile

While many traditional investors are concerned about the volatility of cryptoassets, a number of studies have found that a small allocation to crypto can be beneficial from a risk/return perspective.

In 2020, Fidelity tested the impact of adding a small amount (1 to 3%) of Bitcoin to a traditional 60/40 balanced portfolio. The firm found that portfolios with Bitcoin exposure generated substantially higher returns over the long term than the standard 60/40 portfolio without a significantly higher level of risk. The Sharpe Ratio — which measures a portfolio’s risk-adjusted return — was much higher for the portfolios with Bitcoin exposure.

5-year average return Annualised volatility Sharpe Ratio
Balanced 60/40 portfolio 6.83% 11.67% 0.59
Balanced portfolio with 1% Bitcoin 7.98% 12.04% 0.66
Balanced portfolio with 2% Bitcoin 9.11% 12.54% 0.73
Balanced portfolio with 3% Bitcoin 10.24% 13.16% 0.78

Source: Fidelity. Returns to 30 September 2020.

Fidelity’s findings were similar to those of WisdomTree, which, in 2019, also compared the long-term performance of a global 60/40 portfolio with the performance of balanced portfolios with small amounts (1 to 3%) of Bitcoin. WisdomTree found that the portfolios with Bitcoin exposure generated much higher returns over the long term without a significantly higher level of risk. One particularly interesting takeaway from WisdomTree’s study was that even during so-called ‘crypto winters,’ when cryptoassets experienced major downturns, portfolio performance was not badly impacted.

More recently, analysts at Morningstar examined the effects of adding 5% Bitcoin exposure to a balanced portfolio of traditional assets. Again, the researchers concluded that crypto exposure boosted overall portfolio returns by a wide margin, without increasing risk too much.

Ultimately, the research suggests that adding a small amount of crypto to a traditional, balanced portfolio can pay off. The addition of crypto can potentially boost returns while not having a substantial impact on risk.

How to add crypto to a traditional portfolio

Cryptoassets are still in their infancy and it is difficult to predict which digital assets will be adopted globally in the long term. So, when it comes to investing in crypto, the most sensible approach is to start with a small allocation and diversify capital across multiple different assets.

In an effort to help investors gain diversified exposure to crypto, eToro has developed a number of innovative Portfolios that provide access to multiple digital assets in one investment. These range from straightforward portfolios that provide exposure to crypto using traditional index construction methodologies to more advanced portfolios that actively trade digital assets.

Those looking for straightforward exposure to cryptoassets may wish to consider: 

  • The CryptoPortfolio. This strategy allocates capital to a number of major cryptoassets based on their market capitalisation and representation within the crypto market.
  • The CryptoEqual portfolio. This portfolio provides equally weighted exposure to a number of major cryptoassets. 
  • The Crypto-currency portfolio. This portfolio allocates capital to the two largest cryptoassets: Bitcoin and Ethereum. 

Those who are more advanced in the crypto space and are seeking exposure to the latest crypto trends and disruptive digital asset technologies may wish to consider:

  • The DeFiPortfolio. This portfolio provides exposure to selected cryptoassets that are part of the DeFi revolution, including Ethereum. 

Those looking for exposure to the broader cryptoasset ecosystem may wish to consider:

  • The BitcoinWorldWide portfolio. This portfolio allocates capital to Bitcoin, as well as stocks of companies within the Bitcoin value chain, including mining companies, semiconductor manufacturers, payment companies, exchanges, custodians, and insurance companies. 

Finally, those looking for more actively managed exposure to crypto may wish to consider:

  • The Napoleon-X portfolio. This is a long-term, actively managed quantitative strategy that trades BTC/USD, ETH/USD, LTC/USD, ADA/USD and BNB/USD pairs with equal exposure and regular rebalancing. 
  • The TIE Sentiment AI portfolio (only available in the US). This is an actively managed strategy that uses advanced data analytics technology to trade cryptoassets. 

With eToro’s Portfolios, adding crypto to a portfolio is an easy, straightforward process. With one click, you can gain access to a number of cryptoassets, instantly diversifying your portfolio. 

Sources:

  1. https://finance.yahoo.com/quote/BTC-USD/history?period1=1420088400&period2=1514782800&interval=1wk&filter=history&frequency=1wk
  2. https://finance.yahoo.com/quote/ETH-USD/history?period1=1597104000&period2=1628640000&interval=1d&filter=history&frequency=1d&includeAdjustedClose=true
  3. https://www.fidelitydigitalassets.com/bin-public/060_www_fidelity_com/documents/FDAS/bitcoin-alternative-investment.pdf
  4. https://www.wisdomtree.eu/en-gb/-/media/eu-media-files/other-documents/research/market-insights/wisdomtree_market-insight_bitcoin-in-portfolio_en.pdf
  5. https://www.morningstar.com/articles/1045168/how-a-little-bitcoin-can-change-your-6040-portfolio-a-lot
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