Three strategies to diversify your portfolio with cryptocurrencies

Three strategies to diversify your portfolio with cryptocurrencies

Sygnum Bank’s Head of Asset Management, Fabian Dori, shares his views on high equity valuations, the increasing correlation between traditional assets – and how to intelligently diversify traditional portfolios with cryptocurrencies.

Traditional asset classes are currently facing challenges

Record amounts of fiscal stimulus being injected into economies globally has created challenges for traditional asset classes. Interest rates have moved into negative territory, equity valuations are at record high levels, and the correlation between asset classes have increased.

All this has reduced the amount of value that can be generated from investments and increased the risk of a traditional portfolio. In addition, the massive liquidity injections could create inflationary pressure, leading to the loss of a portfolio’s purchasing power.

During this time cryptocurrencies are emerging as an alternative asset class which can boost returns and diversify a portfolio. Here we outline how to approach the construction of a digital asset satellite portfolio.

Three simple strategies to invest in cryptocurrencies

1. Invest in the core

More than 70 percent of cryptocurrency market capitalization is represented by three tokens – Bitcoin, Ethereum and XRP – which have separate and unique use cases.

Bitcoin is perceived as a store of value, Ethereum is a smart contract platform, while Ripple (or XRP) is a payment network. By investing and trading these tokens, one already gains diversified exposure to the cryptocurrency market.

2. Build out

For investors who would like to take further exposure to smaller, niche protocols with future potential, they can invest in Sygnum’s Platform Winners Index ETP.

The index identifies on a dynamic basis the tokens of the most established, foundational protocols (including smaller ones such as EOS, Binance Chain, Cardano, etc.) and this product provides a convenient, safe entry point to digital asset investing. The ETP has had a gross cumulative return of close to 100 percent year-to-date.

3. Get active

For those seeking greater alpha, Sygnum’s digital asset multi-manager fund is ideal. This fund diversifies across best-in-class digital asset managers and strategies and managers, providing broader exposure to digital assets including value extracted from information asymmetries and market inefficiencies.

The fund has had a gross cumulative return of approximately 40 percent year-to-date.

Get started by investing in Bitcoin

Looking at real historical data, a 5 percent allocation of Bitcoin to a traditional portfolio originally comprising 75 percent equities and 25 percent fixed income would have increased investment returns by 12 percent from the start of 2019 (see performance of portfolio 1 without Bitcoin versus portfolio 2 with Bitcoin in figure 1).

While volatility would have also increased, the outperformance after adjusting for the increased risk is still positive, with a Sharpe ratio of 1.04 compared to 0.76. The winning factor is that Bitcoin and other cryptocurrencies have historically demonstrated a low correlation to traditional assets.

For the most part, Bitcoin’s correlation to equities and fixed income has fluctuated between -10 and +10 percent, which means that in the long-term Bitcoin is a good diversifier and can increase the resilience of a portfolio.

Figure 1

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Disclaimer: The information in this publication pertaining to Sygnum Bank AG (“Sygnum”) is for general information purposes only, as per date of publication, and should not be considered exhaustive. This publication does not consider the financial situation of any natural or legal person, nor does it provide any tax, legal or investment advice. This publication does not constitute any advice or recommendation, an offer or invitation by or on behalf of Sygnum to purchase or sell any assets. No elements of precontractual or contractual relationship are intended. While the information is believed to be from accurate and reliable sources, Sygnum makes no representation or warranties, expressed or implied, as to the accuracy of the information. Sygnum expressly disclaims any and all liability that may be based on such information, omissions, or errors thereof. Any statements contained in this publication attributed to a third party represent Sygnum‘s interpretation of the data, information and/or opinions provided by that third party either publicly or through a subscription service, and such use and interpretation have not been reviewed by the third party. Sygnum reserves the right to amend or replace the information, in part or entirely, at any time, and without any obligation to notify the recipient of such amendment / replacement or to provide the recipient with access to the information. Simultaneously, there is no obligation of Sygnum to inform recipients of information, if before provided information later becomes outdated, inaccurate or obsolete, unless otherwise provided by applicable law. The information provided is not intended for use by or distributed to any individual or legal entity in any jurisdiction or country where such distribution, publication or use would be contrary to the law or regulatory provisions or in which Sygnum does not hold the necessary registration, approval authorisation or license. Except as otherwise provided by Sygnum, it is not allowed to modify, copy, distribute or reproduce, display, license, or otherwise use any content for commercial purposes.

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