Thanksgiving Discussion! Can Bitcoin Exposure Reduce Portfolio Risks?

YEREVAN (CoinChapter.com) — You may have heard the argument that including Bitcoin (BTC) in your investment portfolio mitigates risks and enhances returns. Your parents and uncles and aunts may not believe that. Expecting your lovely boomers to ask you this question during the Thanksgiving dinner? Then, read further for a detailed answer.

Can Bitcoin Exposure Reduce Portfolio Risks?

Several companies have conducted studies on this assertion. While some have argued otherwise, big names in the industry seem confident that it is the case. This article cites reports from several wealth management firms.

What Does K33 Say About Holding BTC?

K33 researchers argue that the extreme correlations between Bitcoin and riskier financial markets like stocks have declined recently. The crypto leader tends to chart a different path than most asset classes, counterbalancing risks if the other side falls too much. 

“Bitcoin is also again shining as a portfolio diversifier… Throughout the past year, BTC exposure would have improved risk-adjusted returns in a traditional 60/40 portfolio due to softening correlations and solid upside” 

the report suggests. 

With the Exchange-Traded Funds (ETFs) making inroads into the crypto sector, crypto diversification through Bitcoin will only become more popular. 

However, K33 is not the only firm that believes Bitcoin exposure can reduce portfolio risks. Other major names have also made similar assertions. 

Fidelity Seconds K33

Boston-based American multinational financial services corporation Fidelity Investments studied Bitcoin’s potential to enhance returns and offer portfolio diversification benefits. 

In its report published earlier this year, the firm asserted that BTC has historically boosted portfolio returns. According to the study, BTC generated average annual returns of 186.7% between August 2010 and August 2022. 

“To test whether bitcoin could offer these benefits, Fidelity compared bitcoin’s historical data to that of stocks, bonds, and gold in various contexts. According to the findings, investing in bitcoin might enhance returns and may offer diversification benefits,”  

the report reads.

Fidelity further found that BTC’s correlation with stocks was 0.60, with a 0.32 correlation with bonds. This indicated to them that the top crypto did not move perfectly in line with these asset classes, thus enhancing portfolio diversification. 

Meanwhile, the study concluded that Bitcoin may not be the best inflation hedge. During the study period, equities performed better than BTC during high inflation. 

Moreover, the study also concluded that Gold outperformed Bitcoin when stocks performed poorly.

Galaxy Digital Also Promotes Bitcoin Exposure 

In a more recent report published on Oct. 02, 2023, global crypto-focused financial services firm Galaxy Digital weighed in. 

The firm, which has massive exposure to cryptos, found that BTC has little correlation to major asset classes. These included the S&P 500, the US Dollar Index, Russell 2000, Gold, etc. 

This low correlation, combined with Bitcoin’s performance, helps it enhance traditional portfolios. 

“Regardless of an individual’s fundamental views of bitcoin, our analysis shows clearly that bitcoin improved the risk-adjusted returns and portfolio diversification of our Base portfolio…During our five-year sample period, allocating to bitcoin from the Base portfolio’s equity sleeve yielded the strongest risk-adjusted returns, lowest volatility, and lowest draw downs,” 

the study found. 

Fidelity and Galaxy Digital’s research agrees that Bitcoin exposure can reduce portfolio risks. Having BTC enhances returns while offering diversification benefits in investment portfolios. 

However, the decision to include Bitcoin should be based on an individual investor’s risk tolerance, investment goals, and overall portfolio strategy.