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Does crypto allocation enhance your portfolio?

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Mint

Wed, Jan 12, 2022

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Crypto is a new breed of asset class that delivered higher returns but with equally higher risk Listen to this article Cryptocurrency acceptance is booming in India, which is now the second-highest nation in terms of crypto adoption, according to a recent report by market research firm Chainalysis.

Crypto is a new breed of asset class that has delivered higher returns but with equally higher risk.

You need to have all the different kinds of asset classes in your portfolio; some commodity, crude oil, currency, stocks, bonds and crypto as well.

Sogani suggests 4-5% allocation in crypto assets can limit the downside risk and provide a boost to the overall portfolio.

We compared a standard investment portfolio of equity and debt in the 60:40 ratio to a portfolio comprising equity, debt and bitcoin in the ratio of 55:35:10 over the last five years.

However, it has not been smooth sailing for crypto assets, as bitcoin had slumped over 70% during 2018, which could have taken a crypto portfolio (equity 55%, debt 35% and bitcoin 10%) into the negative.

According to them, people who are in the process of setting their overall investment portfolio, shouldn’t venture into crypto assets.

While crypto assets, especially bitcoin, are touted as a new asset class that provides some diversification from traditional asset classes, there have been questions raised in the recent past.

According to a recent IMF report, before the pandemic, crypto assets such as bitcoin and ether showed little correlation with major stock indices.

Crypto prices and the US stocks both surged amid easy global financial conditions and greater investor risk appetite," monetary policy and capital markets experts from IMF wrote.

Its correlation with stocks has turned higher than that between stocks and other assets such as gold, investment-grade bonds, and major currencies, pointing to limited risk diversification benefits.

For example, as per the IMF, the correlation between returns on the MSCI emerging markets index and bitcoin was 0.34 in 2020–21, a 17-fold increase from the preceding years.

“I still believe that crypto assets should not be added to a portfolio.

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