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The traditional 60/40 portfolio (balance of equities and fixed income assets) has not been tested for these unprecedented times. Central bank balance sheets are skyrocketing and interest rates are at historic lows. This means that investors are reaching yield far and wide, often without reliable hedging.
Advisors should consider talking to their clients about diversification, particularly in bitcoin. The cryptocurrency offers high returns unrelated to traditional asset classes. This diversification advantage means that bitcoin could be a key hedge against downside risk.
Damanick Dantes, CMT is a macro trader specializing in commodities, stocks and cryptocurrencies. He previously worked on the global asset allocation research team at Fidelity Investments. He will attend CoinDesk’s Bitcoin for Advisors conference November 9-10 to explore the benefits of digital assets.
We saw this in October, when the VIX (a measure of volatility expectations) rose 50% and bitcoin held strong, rising nearly 25%. How about a modern safe haven?
Investors could grab a page from MicroStrategy’s playbook. Even a small bitcoin allocation could help offset the impact of rising inflation, which will erode the purchasing power of cash, which currently produces next to nothing.
There is a good chance that clients will invest more than their money to work in bitcoin and will seek help from their advisors: 76% of the financial advisors surveyed by Bitwise Asset Management received questions from clients about cryptocurrencies in 2019. Time to treat bitcoin like asset class.
Here are four charts that illustrate the benefit of bitcoin for investment clients.
1. Bitcoin has grown along with the volume of negative yielding debt. This means that investors with negative yielding debt lose money when the bond matures. Growing fear has pushed more investors into bonds, causing yields to hit negative territory in some countries. But despite all this uncertainty, bitcoin has kept its shine.
2. Bitcoin has a weak correlation with traditional asset classes. Simply put, bitcoin could provide a useful hedge if stocks fall. It can also function as a hedge against commodity and currency risk.
3. Investors are highly compensated for the risk associated with holding bitcoins. The Sharpe ratio is a measure of risk-adjusted returns. So despite the increased volatility, bitcoin has still been able to outperform traditional asset classes in recent years.
4. Bitcoin is becoming more popular in developing countries. Consumers around the world use bitcoins for payment transactions and remittances. This is great for long-term investors who hold bitcoin both as an international store of value and as a medium of exchange.
