Before the pandemic, bitcoin attracted investors as a hedge against inflation because of its low (almost zero) correlation with traditional assets such as stocks.
Recently, however, the situation has changed 180° due to macroeconomic shifts. According to a 21Shares report, bitcoin and the S&P 500 are moving in sync, and their correlation has risen to an all-time high of 0.69. This has created uncertainty about using cryptocurrency for portfolio diversification.
While 21Shares does not dispute the correlation between cryptocurrencies and traditional assets, experts emphasize that this is a short-term phenomenon. The sixth State of Cryptocurrencies report notes that the two asset classes will take different paths in the long run.
In addition, it is reported that at 0.07, there is virtually no correlation between bitcoin and gold. Based on this, it is concluded that both assets represent “unique diversification resources for investor’s portfolios.”
In terms of returns, many crypto players focus on the timing of investments, picking the period when the returns will be the highest. Crypto investing has also been affected by events such as the collapse of the Terra ecosystem, the Fed’s interest rate hike and the recent shutdown of the Solana blockchain.
The impact of prevailing market conditions has also been seen among institutional investors. Just last month, many of them withdrew funds from crypto investment products, leading to a 10-month low in assets under management.
Nevertheless, the report notes that bitcoin outperformed itself 90% of the time during the year, regardless of the investment period. Investors who bought the asset about three years ago made the maximum profit.
For this reason, experts note that adding crypto assets to one’s investment portfolio “maximizes risk-adjusted returns.” In addition, higher returns are seen in large-cap cryptocurrency portfolios compared to a bitcoin-only portfolio.
21Shares Research Director Eliezer Ndinga said many companies have made similar findings, “understanding how strongly this asset class performs over the long term, despite the ups and downs.”