The Benefits of Increasing Portfolio Diversification with Cryptocurrency

Long-term investors often emphasize three guiding principles: remaining invested throughout various economic cycles, contributing systematically to one’s portfolio, and ensuring adequate diversification across different asset classes. While the first two principles reflect an investor’s commitment over time, the latter involves strategic outlook and expectations regarding asset class performance.

For some investors, diversification is an afterthought, leading them to focus solely on U.S. stocks and bonds, thereby missing out on other investment opportunities and their benefits. However, broad diversification, including cryptocurrencies, can offer significant advantages for long-term investors.

Across the investment landscape, the performance of different asset classes varies annually. Rather than attempting to predict which asset class will excel, diversification encourages exposure to a mix of all. Multi-asset investing, which has gained prominence among investors, involves spreading risk and enhancing potential returns by including various asset types in a portfolio, such as equities, fixed-income securities, real estate, and cryptocurrencies.

While U.S. equities delivered a strong 23% performance last year, cryptocurrencies, particularly Bitcoin, outperformed the S&P 500 Index by returning 156%. Despite Bitcoin's high-risk/high-return nature, there are compelling reasons to consider a reasonable cryptocurrency allocation within a portfolio, especially given the current market backdrop.

The robust performance of U.S. equities in 2023 was primarily driven by mega-cap companies like Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), Amazon.com, Inc. (NASDAQ: AMZN), NVIDIA (NASDAQ: NVDA), Alphabet, Inc. (NASDAQ: GOOGL), Meta Platforms, Inc. (NASDAQ: META), and Tesla (NASDAQ: TSLA). However, this concentration makes investors susceptible to changes affecting these companies.

Conversely, Bitcoin and other crypto assets have shown relatively low correlation to public equities. This low correlation, combined with high returns, means that Bitcoin and other crypto-assets can enhance portfolio diversification and potentially increase returns.

In an uncertain macroeconomic and geopolitical environment, the decentralized nature of Bitcoin and other cryptocurrencies has become more appealing. They possess 'safe-haven' qualities that investors value during periods of elevated market risk.

Crypto assets expand the spectrum of risk and return available to investors in public markets. For those willing to take more risk, the crypto asset class can potentially offer higher total returns through liquid instruments widely available on exchanges.

Every individual's personal investment situation is unique, and the appropriate exposure to a particular asset class will vary based on factors such as age, experience, income level, and risk tolerance. Given that crypto is a high-risk/high-return-potential asset class with low correlation to stocks, it can help investors address some of the challenges in portfolio construction today. A moderate allocation can significantly impact portfolio performance.

Caleb & Brown, the crypto investor's expert partner, provides premium and personalized services for both beginner and advanced investors, offering Bitcoin and hundreds of other crypto assets for portfolio inclusion. A dedicated relationship manager is available to guide investors, providing the confidence needed to navigate the crypto world.

Featured photo by Daniel Dan on Unsplash.

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