Cryptocurrencies like Bitcoin and Ethereum have become a key part of many investors' portfolios, and 21Shares recently looked at the impact of allocating to these crypto assets.
The mutual fund issuer, 21Shares, published an article entitled “First: Cryptoassets Included in A Diversified Portfolio – Q2 2024”, in which he analyzed the results of having investments allocated to the two main cryptocurrencies on the market and what are the risks that investors run, compared to other financial assets.
The advantages of Bitcoin and Ethereum for investors
Cryptocurrencies are a new and emerging class of digital assets, which have been used, primarily, as global payment methods for their ability to make cross-border transactions without having to deal with the middlemen, high commission costs and confirmation wait times of traditional methods. But, in addition to this, cryptocurrencies have also become potential investment assets.
Bitcoin and Ethereum, the two largest cryptocurrencies by market capitalization, are receiving the most attention as alternative investment assets, especially since the approval of listed financial vehicles that allow retail and institutional investors to gain direct, regulated exposure to the spot market price of these cryptoassets.
21Shares therefore believes it is prudent to inform investors about risk management and the potential outcomes of allocating to crypto assets such as Bitcoin and Ethereum.
In its report, the firm highlighted that “Adding exposure to crypto assets will lead to superior risk-adjusted investment outcomes”, precisely because these digital assets provide investors with the “opportunity to further diversify their portfolios and maximize returns”.
21Shares added that these cryptocurrencies have enormous potential to improve risk profiles by magnitudes.
The low correlation of cryptocurrencies with traditional assets
The ETF issuer also highlighted that Bitcoin and Ethereum have become viable portfolio diversification tools, thanks to having a low correlation with the main asset classes in the market.
In the case of Bitcoin, the firm noted that the market-leading cryptocurrency's correlation with traditional assets remains between 0,02 and 0,36; figures that are similar to those of gold over the past 5 years. Regarding Ethereum, the correlation ranges between -0,01 and 0,35.
“This low level of correlation makes both assets a vital source of diversification for traditional portfolios”, 21Shares pointed out.
In reference to gold, the firm argued that there is almost no correlation between Bitcoin and gold, or Ethereum and gold, which gives even more importance to both cryptocurrencies as “unique diversification resources” for investors’ portfolios. However, these correlation levels of cryptocurrencies with traditional asset classes have changed based on market sentiment and crisis situations, such as during the Silicon Valley Bank run.
21Shares tests allocations to cryptocurrencies
For its report, 21Shares analyzed a hypothetical traditional investment portfolio with 60% allocated to stocks and 40% allocated to bonds. The firm conducted a series of Backtesting Bitcoin and Ethereum Allocations to this portfolio to evaluate the results and impact of these allocations.
In conclusion, 21Shares found that an allocation between 1% and 5% of Bitcoin to a simple growth portfolio can improve adjusted profitability and annualized performance portfolio. Among the recommendations, he stressed the importance of rebalancing BTC allocations on a quarterly basis, which is the most advisable period to do so, according to the results of the backtests. The results also showed that the moment of starting to invest in BTC is not important, since in almost all tests, the benchmark was exceeded within a period of 1 to 3 years.
Regarding Ethereum, portfolio diversification with 1% allocation to ETH yielded almost the same results as Bitcoin, finding an improvement in adjusted returns and annualized performance. However, 21Shares notes that rebalancing ETH allocations is more efficient if done annually.
The firm also looked at combined allocations to Bitcoin and Ethereum, with 5% BTC and 1% ETH.
“This report has demonstrated the benefits of allocating a portion of the portfolio to Bitcoin and Ethereum through extensive backtesting”Pointed.
Despite the attractive results, 21Shares warned against the risks of investing in crypto assets and clarified that the BTC and ETH allocations of the hypothetical investment portfolio were analyzed in retrospect, so the performance obtained in its tests is not a guarantee of future results for investors.
IMPORTANT: The content of this article is for informational purposes only and, in no case, what is written here should be taken as investment advice or recommendations. Bit2Me News reminds you that before making any investment you should educate yourself and know where you invest your money, as well as the pros and cons of the system. We separate ourselves from the actions and consequences that ignorance may entail. If you decide to invest in this or another asset class, you are solely responsible for the consequences that your decisions and actions may have.
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