Bitcoin’s high volatility is a feature that can be harnessed to make it a useful alternative asset, researchers have said.
Despite crypto’s increasingly widespread adoption and the introduction of bitcoin ETFs from the likes of BlackRock and Fidelity, die-hard critics argue the price volatility is a bug that renders it unsuitable for most investment portfolios.
The paper produced by BCA Research’s global asset allocation team lays out while this volatility should be viewed as a reason to include bitcoin in the asset allocation mix, rather than shun it.
The team concluded that high-volatility assets such as bitcoin are preferable as diversifiers to low-volatility assets due to their better capital efficiency. This holds true even for very conservative investors.
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In the paper, Juan Correa-Ossa, associate vice president at the firm, compared bitcoin to a fictional low-volatility asset called ‘boringcoin’.
He said boringcoin is the ‘grown-up ‘version of bitcoin, suitable for conservative investors. It is perfectly correlated with bitcoin, and has the same Sharpe ratio of 0.61.
Despite their similarities, the higher volatility of bitcoin meant the hypothetical portfolios which included it outperformed those which held boringcoin instead.
The analysis determined that an unconstrained portfolio which can use leverage will always do an equal or better job at maximising expected returns per unit of risk than a constrained one.
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BCA said that this is because high volatility assets use capital more efficiently, which means the ‘leverage constraint will be less of a limiting factor’. Reducing the need for leverage is highly beneficial, and is what makes bitcoin suitable even for conservative investors.
Correa-Ossa explained that instead of judging assets like crypto by how they perform individually, asset allocators should think holistically, analysing the affect on the overall behaviour of a portfolio. In doing this, they might find opportunities they would never have otherwise considered, he noted.
