The historic magazine The Economist is giving Bitcoin high praise, saying that the crypto holds attractive investment advantages over other assets.
A recent article from the 178-year old magazine says that Bitcoin’s low correlation with traditional markets makes it a potentially excellent source of diversification.
The article leads with a quote from Nobel Prize winner Harry Markowitz’s Journal of Finance, a paper that helped lay the foundations for “modern portfolio theory,” which shares why riskiness isn’t necessarily the top concern of investors, but rather how much volatility that risky asset contributes to the portfolio.
“An investor holding two assets that are weakly correlated or uncorrelated can rest easier knowing that if one plunges in value the other might hold its ground…
This is where Bitcoin has an edge. The cryptocurrency might be highly volatile, but during its short life, it also has had high average returns. Importantly, it also tends to move independently of other assets – since 2018 the correlation between Bitcoin and stocks of all geographies has been between 0.2-0.3. Over longer time horizons it is even weaker. Its correlation with real estate and bonds is similarly weak. This makes it an excellent potential source of diversification.”
The findings in The Economist show that even throughout Bitcoin’s 2018-2019 bear market, a portfolio with 1% allocation to Bitcoin still offered a higher risk-reward option than one without it.
“…An optimal portfolio contained a Bitcoin allocation of 1-5%. This is not just because cryptocurrencies rocketed – even if one cherry-picks a particularly volatile couple of years for Bitcoin, say January 2018 to December 2019 (when it fell steeply), a portfolio with a 1% allocation to Bitcoin still displayed better risk-reward characteristics than one without it.”
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Featured Image: Shutterstock/Angela Harburn