How BTC enhanced portfolios are radically better than the traditional portfolios.
Investigating BTC's place in traditional portfolios.
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 the rest of it into not considering its place as a part of a balanced portfolio of investments. We made two virtual portfolios for our study:
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 invest in bonds is the same, hence 65% of the funds in stock indices with 5% in BTC.
In the first chart, the Bonds and the indices we followed were from the Asian-Pacific region, and bonds were short term maturity bonds, for example, Queensland Treasury Corporation, Australia.
Our research, however, shows that by investing as little as 5% of the total portfolio, returns can be quadrupled without losing sleep over the volatility aspect of BTC.
The equity assets that we included from the Asian-Pacific region stock indices closely reflect how the markets have performed this year.
A diversified portfolio of stocks from different geographical regions such as TOPIX 200 Index, S&P/AUX 200, or Hang Seng Index, etc. are used for this study.
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 this year have not done well, Bitcoin has come from $5000 to around $14000. The value almost tripled in eight months.
By allocating 5% of your portfolio value in Bitcoin along with 65% in stock-indices gave returns of 16.919%. Almost 4 times what the same funds invested were previously making. The line-chart above shows how our portfolio’s value changed from January 1, 2019, to August 7, 2019. The orange line shows the value of the portfolio with 5% of the funds in BTC, and the blue line shows the value of the portfolio without BTC. Note that gradually the difference between the value of BTC enhanced portfolio is increasing and is expected to make more by the end of this year as compared to the other portfolio.
A similar trend can be seen in investment portfolios around the world. A similar methodology is used for regional portfolio construction, what we found out is that in South Africa, a portfolio diversified with a 5% allocation in Bitcoin would have given an average investor 7x returns relative to an average investment portfolio.
The chart below shows similar findings, but this time we chose the European Markets: indices such as EURO STOXX 50, Deutsche Boerse AGGerman Stock Index DAX, etc. have been used. Here too the BTC Enhanced Portfolio outperforms the average portfolio by approximately 100%. Trend lines show the performance of the BTC enhanced portfolio against the Eurozone market. An average portfolio returns 11.01%, but a BTC-enhanced portfolio returns 20.632%.
Similar results are seen when looking at the US markets. The BTC enhanced portfolio returns 1.6X the average market portfolio.
The chart below shows the correlation of BTC with the indices of stocks that we chose for research. The Correlations fall within a band of (+0.2,-0.15). Close to zero correlation implies that BTC is perfect for diversification.
The results in the Newsletter are only for informative purposes and is not an investment advice. It is advisable to do your research before investing in any asset class or portfolios mentioned in this letter.