Bitcoin prices have crashed, but the case for portfolio diversification with crypto hasn't.
DreamstimeBitcoin ’s crash this year—down more than 70% since the November 2021 all-time high—may have curious investors wanting to stay far away from crypto. But analysts say that digital assets continue to be a genuine way to diversify a portfolio.
Adding Bitcoin and other digital assets can actually lower overall portfolio risks through diversification, Benson Durham and Roberto Perli, analysts at Piper Sandler , wrote in a note Wednesday.
This might come as a surprise considering the state of the crypto market , which was worth almost $3 trillion 10 months ago and has since fallen to a market capitalization of less than $1 trillion.
While shocks within crypto itself are partly to blame, the selloff in digital assets has come in tandem with a bear market in stocks , with the S&P 500 and especially the tech stock-heavy Nasdaq tumbling this year. Investors have shifted away from high-growth and riskier bets like Bitcoin and tech stocks this year amid red-hot inflation and a t ightening of financial conditions by the Federal Reserve.
Years ago, crypto traded largely independently from mainstream finance, but a boom in popularity since 2020 and the influx of retail, professional, and institutional investors alike has helped Bitcoin become correlated with risk-sensitive assets like stocks. When stocks have fallen in 2022, cryptos have typically plunged.
In fact, the correlation between Bitcoin and U.S. stocks is about as high as it has ever been, Durham and Perli said—and that does pour water on the investment thesis that Bitcoin can act as a good portfolio hedge.
But looking past the role of crypto in hedging a portfolio, the team at Piper Sandler see that Bitcoin’s volatility relative to the S&P 500 has fallen substantially since 2019. That even accounts for this year’s wipeout, which has brought eye-watering losses and stomach-churning price swings .
“This trend may be consistent with Bitcoin ‘maturing’ as an asset class, perhaps with an increasing stable, buy-and-hold-for-longer investor base,” Durham and Perli said.
“On balance through this latest Bitcoin drawdown, the case for diversification seems neither more nor less compelling than before,” the analysts added. “Adding other risky assets can lower overall portfolio risk substantially, by about almost half as of yesterday in fact.”
Of course, none of this bears on the expected returns from Bitcoin, the team at Piper Sandler noted, adding that investors can’t escape the worst scenarios and that bubbles and overall speculation remain a concern for the space.
Write to Jack Denton at jack.denton@dowjones.com
