Study Shows: Even the Most Conservative Investors Should Invest in Blockchain Assets

Blockchain assets increase the return of a conservative multi-asset portfolio without significantly impacting its risk profile. A recent study shows that even conservative investors should consider a small blockchain allocation.

Blockchain assets increase the return of a conservative multi-asset portfolio without significantly impacting its risk profile. A recent study shows that even conservative investors should consider a small blockchain allocation.

Blockchain assets should be part of every investor’s portfolio. Over the past years, Bitcoin has outperformed every traditional asset class in terms of risk-adjusted returns. 

Today, a decade after Bitcoin came into existence, there is sufficient data to analyze the performance of digital currencies over an extended timeframe. Binance Research has recently published a study that confirmed Bitcoin’s positive impact on the risk-return profile of a traditional multi-asset portfolio. 

Diversification with Bitcoin: high volatility and non-correlation to other asset classes 

Bitcoin is still highly volatile, even though its volatility has been steadily decreasing since the genesis block. While high volatility may be a concern when considering Bitcoin as a stand-alone investment, it can add considerable value to conservative investment portfolios.

Chart 1 – Rolling 90-day annualized volatility; Source: Binance Research

The other reason why portfolio managers should consider allocating funds to Bitcoin is its non-correlation to other asset classes. Over the past three years, Bitcoin showed a median correlation coefficient with all other non-crypto asset classes below 0.10, meaning the price movements of these assets do not significantly impact the price of Bitcoin and vice versa. 

Chart 2 – Three-year weekly return correlations among asset classes; Source: Binance Research

Bitcoin allocation increases portfolio returns without significantly impacting price volatility

To show the effect of a Bitcoin allocation on a traditional multi-asset portfolio, Binance Research investigated what effect Bitcoin allocations of 1% and 5% would have on the risk-return profile of two popular ETFs: BlackRock’s iShares Morningstar Multi-Asset Income ETF and Vanguard’s VPGDX Managed Payout Fund.

BlackRock’s fund consists of 60% bonds, 20% stocks, and 20% alternative income sources. VPGDX includes 55% stocks, 20% bonds, and 25% alternative and other sources.

The study period spans from 31st December 2015 to 30th June 2019. This timeframe includes sharp increases of the price of Bitcoin, its crash in early 2018 and the crypto winter where Bitcoin prices remained mostly flat.

The below table summarizes how a Bitcoin allocation of 1% and 5% of the total portfolio value would have affected the funds’ risk-return profiles. In each case, the portfolio including Bitcoin would have led to an improved risk-return profile. 

Table 3 – Aggregated results for monthly rebalanced portfolios with 1% and 5% Bitcoin allocations; Source: Binance research

A Bitcoin allocation of 1% would have added about 1.5% to the annual portfolio return of both funds over 3.5 years, without increasing the annualized volatility. Even the maximum drawdown did not increase significantly. That means investors could increase their returns while taking relatively little additional risk. 

A target weight of 5% would have increased the annual volatility of both funds by about 1% and resulted in much higher drawdowns. However, the annual return of both funds almost doubled, meaning investors can significantly boost their returns, but portfolio risk would go up as well. 

Even conservative investors should invest at least one percent in blockchain assets

The findings show that Bitcoin can lift a portfolio’s annual return without significantly affecting its volatility and its maximum drawdown. As long as Bitcoin allocations remain small, even conservative investors are better off holding at least 1% of Bitcoin.

The larger the allocation, the more significant the impact on volatility, but also on returns. Thus, investors with greater risk appetite may want to ramp up their blockchain allocation to 5% or more. 

Binance Research only considered Bitcoin, which is just one blockchain asset out of many. However, it is the leading digital currency by market capitalization and popularity and therefore has a significant impact on the entire market. It’s also the one that has been around the longest and provides the most significant datasets. 

There is more than just Bitcoin: Investors need a diversified blockchain asset pool

Besides the rather rudimentary investment case analyzed by Binance Research, investors can do more to truly reap the benefits of the asset class.

Firstly, investors should look at adding other large-cap blockchain assets such as Etherum or XRP as well, to construct a diversified basket of blockchain assets to complement their existing portfolio structures. 

Secondly, blockchain markets offer other attractive opportunities such as arbitrage trading. However, as markets have become more efficient, price differences across exchanges are arbitraged within a matter of seconds, which makes it almost impossible for retail investors to generate arbitrage profits.  

According to Binance Research, 1% of price differences disappear within 5 seconds, 90% within 35 seconds. Thus, it needs a high-frequency trading machine to generate arbitrage gains. While this kind of trading has so far been limited to the professional investment realm, retail investors now can invest in actively managed portfolios to participate in the benefits of such trading strategies. 

The bottom-line of this research is that even conservative investors benefit from allocating at least small amounts of their portfolio to blockchain assets. The returns are attractive and the risks are insignificant as long as the allocation remains small. 

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