The new frontier: Cryptoassets can boost traditional investment portfolios
Abra recently published a paper about how adding small amounts of crypto to a traditional investment portfolio consisting of stocks and bonds can greatly help overall performance.
This is the first in of series of posts about the paper and its conclusions.
The biggest takeaway of “The new frontier: Cryptocurrencies are an asset class that can enhance traditional investment portfolios” is that cryptocurrencies are a useful way to add the right kind of volatility to a portfolio, which can lead to better overall returns.
Of course, the risk has to be the right kind and balanced against other factors.
In order to find the right kinds of volatility, portfolio managers have developed tools to study risk and reward to make decisions about portfolio compositions and weights.
To explain how this works “The new frontier” paper looks at three major investing concepts and breaks down how they work in a crypto context — correlation, Sharpe ratio, and efficient frontier.
The paper uses those tools to look at how a portfolio dominated by stocks and bonds would have performed if only small percentages of crypto were added. The paper’s analysis is drawn from cryptocurrency market data and the performance of the U.S. stock and bond market starting in 2010 and ending in late 2018.
Crypto in a traditional investment portfolio, how it works
One of the conclusions drawn by the paper’s analysis is that crypto offers superior risk-adjusted performance. In other words, despite crypto’s inherent risk in the form of volatility, the payoff, or return of crypto investments, has been orders of magnitude greater than the returns of other asset class investments.
The paper also examines what would have happened over the past eight years if only one percent of a traditional portfolio was invested in crypto and then rebalanced to maintain that one percent level through the up and down crypto market cycles.
Not to spoil the ending, but the major takeaway is that adding a small percentage of crypto to a traditional portfolio over the last eight years, lead to outsized returns when compared to a portfolio consisting solely of stocks and bonds.
The paper goes into more depth about different investment risk scenarios and portfolio constraints.
As a reminder: Any content contained in this blog post is provided for informational purposes only and is not intended as financial or investment advice.