Crypto Non-Correlation – Risk Reduction and Portfolio Hedging

I was talking to some colleagues advising clients on portfolio management and asset diversification. It came up in the context of most blockchain tokens and cryptos being uncorrelated to other asset classes like stocks and bonds. Correlation is one of the important metrics of portfolio construction as they help you avoid all your assets moving in the same direction in downward trends. There are several tools now that specifically measure the crypto assets correlation to other asset classes and importantly they have been historically non-correlated. If your retirement fund moved up or down, was completely unrelated to whether cryptos move up and down. There are limits to the usefulness of such statistical measures as extreme market conditions (like investor panic in 2008) tend to make most assets correlated. One site I like in particular is Sifr Data, which I found was most statistically sound.

In their view any and all kinds of assets (stocks, bonds, futures, cryptos) can have a role in portfolios if they are matched to the risk tolerance if the investor. One topic, in their view, that is missing in the general question of blockchain value creation is the role of coins and tokens as inherent risk reducer or multiplier in the portfolio. This points far beyond the question of volatility.

Investors mostly understand hedging assets like coffee stocks with coffee bean futures or bitcoin portfolios with bitcoin futures. What is less understood is how cryptos or any asset can help reduce (or increase) the overall risk of a portfolio.

There is frankly nothing new here from a theory perspective. Cryptos should be assessed like any other asset class for inclusion in the portfolio. The volatility and correlation should drive decision of portfolio construction including % of funds allocated and benchmark target performance.

There are endless tools for portfolio construction by investment advisors and most can include any asset category in their models including cryptos. The historical performance is arguably short, however we all know historical performance for most asset classes is not predictor of future prices, volatility and performance

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