The Role of Bitcoin as a Diversifier in a Traditional Portfolio

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It appears that Bitcoin has been a good diversifier in a traditional portfolio. We believe that effect will likely continue because Cryptocurrencies are still nascent and we think there is a lot of room before the technology becomes mainstream and the asset class widely attractive to institutional investors and society at large. 

An investor who decides to include in his/her portfolio a directional exposure in Crypto has three main way of doing so:

  • By directly buying and storing Cryptocurrencies such as Bitcoin.
  • By an allocation in a single coin investment vehicle such as the GBTC Trust offered by Grayscale (www.grayscale.com).
  • By an allocation in a fund or similar vehicle that replicates a passive benchmark such as a capitalization weighted portfolio of, say, the top 30 most liquid coins. Much like the Cryptos Fund which used to replicate the CCi30 index (https://cci30.com ).

But we believe there is a better way to gain directional exposure in Crypto by combining a “Long Only” risk-weighted portfolio of the top 5 or 10 coins with an “active tilt” that includes trend following, short term mean reversion and carry trades in each of the allocations in our Crypto portfolio. By monitoring the risk contribution of each coin we effectively reduce the volatility of the portfolio as well as the maximum drawdown while maintaining directional exposure in Bitcoin. This approach gives us reduced returns compared to the other Crypto exposures mentioned above. But the reduction in overall risk and drawdown will likely produce higher risk adjusted returns. 

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