The historic magazine The Economist is giving Bitcoin high praise, saying that the crypto holds attractive investment advantages over other assets.
A recent article from the 178-year old magazine says that Bitcoin’s low correlation with traditional markets makes it a probably wonderful source of diversification.
The article leads with a quote from Nobel Prize winner Harry Markowitz’s Journal of Finance, a paper that helped lay the foundations for “modern portfolio theory,” which shares why riskiness isn’t necessarily the top concern of buyers, however somewhat how a lot of volatility that risky asset contributes to the portfolio.
“An investor holding two assets that are weakly correlated or uncorrelated can relaxation simpler understanding that if one plunge in value the other might hold its ground.
That is the place Bitcoin has an edge. The cryptocurrency might be highly risky, however, during its brief life, it additionally has had excessive common returns. Importantly, it additionally tends to maneuver independently of different assets – since 2018 the correlation between Bitcoin and stocks of all geographies has been between 0.2-0.3. Over longer time horizons it’s even weaker. Its correlation with real estate and bonds is similarly weak. This makes it an excellent potential source of diversification.”
The findings in The Economist show that even all through Bitcoin’s 2018-2019 bear market, a portfolio with 1% allocation to Bitcoin still offered a higher risk-reward option than one without it.
“An optimum portfolio contained a Bitcoin allocation of 1-5%. This isn’t just because cryptocurrencies rocketed – even when one cherry-picks a very unstable couple of years for Bitcoin, say January 2018 to December 2019 (when it fell steeply), a portfolio with a 1% allocation to Bitcoin nonetheless displayed higher risk-reward characteristics than one without it.”
Source: DailyHodl
