Investigating Bitcoin’s utility in traditional portfolios — A multi-region study
How a Bitcoin enhanced portfolio would have fared against the coronavirus-related market movements when compared to a traditional one
Traditional portfolio managers are aversive to investing in Bitcoin(BTC) due to its extreme volatility. Much of this sentiment translates into disregarding the huge profits that BTC can make with reasonable risks and subsequently, not considering its place as a part of a balanced portfolio of investments.
Given the recent stock market conditions, we wanted to see how a Bitcoin enhanced portfolio would have fared against the coronavirus-related market movements when compared to a traditional one without BTC.
To investigate, we made two virtual portfolios for the year 2019–2020
- A general portfolio with 70% funds in stock indices and 30% in bonds
- A 5% BTC enhanced portfolio
In the 5% BTC weighted portfolio, the funds allocated to bonds is the same, that is, 65% of the funds are in stock indices and 5% in BTC.
CASE 1: APAC Region
The line-chart above shows how our portfolio’s value changed from April 9, 2019, to April 9, 2020.
By allocating 5% of our portfolio value in Bitcoin along with 65% in stock-indices, gave 3.6% more returns than the general portfolio.
The reason for such allocation of funds is to have a portfolio that has a risk-return profile that is open to positive externalities while limiting the downside potential.
As its supply and demand dynamics are relatively decentralized, market emotions stimulated by the Fed show less impact on how Bitcoin’s price changes. It should be clear by the fact that while many stocks last year did not do well, Bitcoin came from $5,000 to around $14,000. The value almost tripled in eight months.
The bonds and indices we followed were from the Asia-Pacific region. Bonds were short term maturity bonds, for example, Queensland Treasury Corporation, Australia. A diversified portfolio of stocks from different geographical regions such as TOPIX 200 Index, S&P/AUX 200, Hang Seng Index, etc. were used for this study.
The equity assets that we included from the Asia-Pacific stock indices closely reflect how the markets performed during this time.
A similar trend can be seen in investment portfolios of different regions around the world.
CASE 2: South Africa
In South Africa, a portfolio diversified with a 5% allocation in Bitcoin would have given an average investor, 7% more returns relative to an average investment portfolio.
CASE 3: Europe
European Markets show similar results. For this simulation, indices such as EURO STOXX 50, Deutsche Boerse AGGerman Stock Index DAX, etc. were used.
Here too, the BTC enhanced portfolio outperformed the average portfolio by approximately 4%.
Trend lines show the performance of the BTC enhanced portfolio against the Eurozone market.
CASE 4: USA
The correlation of BTC with the indices that we selected for research fell within a band of (-0.03, -0.12). Close to zero correlation implies that BTC is great for diversification.
- For every region, BTC enhanced portfolios outperformed the traditional ones.
- BTC and the stock market both fell drastically due to the coronavirus sell-off event, but, while Bitcoin has recovered to key levels of support, stock markets have not.
The results in this article are only for informative purposes and are not investment advice. It is advisable to do your research before investing in any asset class or portfolios mentioned here.