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.
About Abra
Established in 2014, Abra is on a mission to create a simple and honest platform that enables millions of cryptocurrency holders to maximize the potential of their assets. Abra enables both individuals and businesses to safely and securely buy, trade, and borrow against cryptocurrencies – all in one place. Abra’s vision is an open, global financial system that is easily accessible to everyone.
Why Abra
Based in the United States, Abra is available in over 150 countries and makes it easy to convert between crypto and a wide variety of local fiat currencies. With over 2MM customers, $7B in transactions processed, and $1.5B in assets under management, Abra continues to grow rapidly. Abra is widely loved and trusted – in April 2022, pymnts.com reviewed and rated Abra amongst the top 5 most popular crypto wallets in the market. Abra is backed by top-tier investors such as American Express Ventures and First Round Capital.
How Abra Protects Your Funds
Abra places clients’ financial objectives and security first. Abra practices a culture of risk management across all levels and functions within the organization.
Abra employs a state-of-the-art enterprise risk management framework that comprises a comprehensive set of policies, procedures, and practices detailing all applicable risk-related objectives and constraints for the entirety of the business. Abra has instituted a complete set of requisite systems and controls that continuously enforce these policies, procedures, and practices to manage all operations, including credit and lending. Abra’s independent Risk Committee comprises experienced compliance, risk, securities, and fraud operations professionals with backgrounds in industries ranging from traditional and digital assets banking, payments, remittance, to fintech.
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