Digital Currency Revolution Series: Why Are Cryptocurrency Portfolio Management Strategies Required?

After BTCUSD has bottomed out at $3,122.28 levels, the pair has surged to the June highs of $13,880 levels which is almost more than 344% so far (in just 6-7 months or so, refer monthly chart). It has halted the vigorous rallies and turned bearish again to plunge back towards $10k levels. Because of the huge turbulence in the cryptocurrency markets, portfolio diversification is essentially needed. As per the famous quote, it is unwise to put all eggs into single baskets,  hence, diversification is a risk management strategy for such turbulence that comprises a wide range of crypto-investments within a portfolio. The rationale behind this technique is that a portfolio construction of different kinds of cryptos will, on average, yield higher long-term returns and lower the risk of any individual holding or security.

Binance Research Team has come up with a series of analytical reports on Bitcoin in various investment strategies.

Some fundamental factors such as volatility and some apprehensions on valuations of Bitcoin and other cryptocurrencies are contemplated, which is why portfolio diversification using correlations with other asset classes are investigated and the liquidity profile of Bitcoin as a financial asset is also discussed.

Binance Research evaluates that Bitcoin’s correlation with other traditional asset classes such as commodities, equities or fixed-income products.

The report, entitled “Portfolio Management Series 1: Diversification Benefits with Bitcoin” finds that portfolios that include Bitcoin tend to exhibit overall better risk-return profiles than traditional multi-asset class portfolios.

The key takeaways of research reports:

For a decade or so, the pioneer cryptocurrency (Bitcoin) has been an extremely volatile asset, exhibiting steep slumps as well as sharp rallies recorded in the historic price actions.

While there is no significant correlation of BTC with other traditional asset classes such as commodities, equities or fixed-income products since its inception during 2009 despite huge turbulence.

From trading grounds, Bitcoin is one of the most liquid assets with consistently low spreads (median spread less than 2-3bp), high volumes and price efficiency as trading venues are continuously being arbitraged.

Binance Research simulated different Bitcoin allocation techniques in existing diversified multi-asset portfolios. All simulated portfolios which included Bitcoin exhibited overall better risk-return profiles than traditional multi-asset class portfolios. These results show that Bitcoin provides active diversification benefits for all investors worldwide, following multi-asset strategies.

With the creation of institutional-focused solutions for custody and other new investment vehicles, Bitcoin has become an essential alternative asset to be included in multi-asset portfolios for its diversification properties. Courtesy: Binance Research