Investors Focusing Solely on Bitcoin Forego More Than They May Think
The ongoing developments between the U.S. Securities and Exchange Commission and potential issuers of Bitcoin spot ETFs are capturing significant attention in the crypto space. An approved Bitcoin ETF could enhance accessibility and mark a bullish phase for cryptocurrencies.
However, investors who restrict their exposure to only Bitcoin and Ethereum might miss out on the broader potential of digital assets in their portfolios.
Expanding the digital asset investment horizon beyond the largest cryptocurrencies strengthens crypto portfolios in key ways:
Improving Diversification
Within the crypto ecosystem and in the context of an investor’s overall asset allocation, holding a wider range of digital assets can improve diversification and mitigate single-token concentration risks.
Investors should consider two critical questions:
- Do cryptocurrencies offer long-term diversification benefits compared to traditional assets?
- If yes, is Bitcoin sufficient to capture this benefit fully, or should other tokens be included?
Analysis of rolling correlations among the top 25 crypto assets provides insights:
- Correlations to Traditional Portfolios: Over a two-year period, digital assets demonstrated strong diversification characteristics, with correlations to a U.S. 60/40 stock/bond portfolio below 0.50. The average correlation improved from 0.46 (Bitcoin alone) to 0.40 across the top 25 assets.
- Correlations Among Crypto Assets: Non-Bitcoin crypto assets showed varying correlations to Bitcoin, debunking the myth that "all crypto is the same." Exposure to diverse blockchain use cases and sectors enhances token-level diversification.
Accessing a Broader Set of Active Management Strategies
Active crypto managers focusing solely on Bitcoin are often limited to market timing—a notoriously difficult strategy. Relative value investment strategies, common in traditional finance, offer more sustainable opportunities for uncorrelated alpha generation.
Effective relative value strategies require:
- Asset Breadth: A wide selection of crypto assets.
- Differentiation: Meaningful distinctions between assets.
Analysis of residual returns (excluding Bitcoin’s influence) among the top 25 crypto assets reveals:
- The average residual correlation between token pairs was 0.29, indicating significant unique variation (up to ~90%).
- This differentiation supports robust relative value strategies, enabling active managers to exploit idiosyncratic opportunities.
Conclusion
Multi-asset crypto portfolios provide:
- Enhanced diversification by spanning diverse blockchain use cases.
- Opportunities for relative value active management across crypto sectors.
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FAQ
Why diversify beyond Bitcoin in a crypto portfolio?
Diversification reduces single-token risk and captures the full spectrum of blockchain innovations, improving portfolio resilience and potential returns.
How do correlations impact crypto portfolio construction?
Lower correlations between assets enhance diversification benefits. Multi-asset portfolios leverage this to mitigate volatility and improve risk-adjusted returns.
What are relative value strategies in crypto?
These strategies compare asset pairs to identify mispricings, enabling managers to profit from valuation disparities rather than outright market direction.
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Note: The views expressed are those of the author and do not represent institutional endorsements.