Prior to the pandemic, Bitcoin appealed to many as an inflationary hedge due to its low (near zero) correlation with traditional assets such as stocks.
However, in recent times, the narrative has taken a 180° turn, owing to macroeconomics shifts. According to a report by 21Shares, Bitcoin and the S&P 500 moved in sync, with their correlation rising to an all-time high of 0.69. This bred uncertainty in the usefulness of crypto assets in portfolio diversification.
While it does not dispute the coupling of crypto and traditional assets, 21Shares shows that this is only a short-term event. In its sixth issue on the “State of Crypto,” the company noted that the two asset classes move on distinct paths in the long term.
Additionally, the report showed that at 0.07, there is almost no correlation between Bitcoin and gold. From this, 21Shares concluded that the two assets present “unique diversification resources for investors’ portfolios.”
As for returns, many crypto players focus on the timing of their investments, seeking a suitable period when returns will be highest. Crypto investments have been impacted by events such as the downfall of the Terra ecosystem, Fed interest rate hikes, and the recent Solana blockchain halt, among others.
The effect of prevailing market conditions has also been seen among institutional investors. Just last month, many of them withdrew funds from crypto investment products, causing a 10-month low in assets under management (AUM).
Differently, the report concluded that timing, in most instances, is not an important factor when making crypto investments. In 90% of cases, Bitcoin outperformed itself within a year regardless of when it was invested. The digital asset’s price movements were even better when invested for three years in 100% of cases.
For this reason, the firm noted that adding crypto assets to one’s investment portfolio “maximizes risk-adjusted returns.” Additionally, better returns are seen in “large-cap crypto” portfolios compared to “Bitcoin-only” portfolios.
That said, Eliézer Ndinga, director of research at 21Shares, said many companies and institutions have made similar conclusions, “realiz[ing] how strongly the asset class performs long-term despite ups and downs.”
Note that several giant institutions, such as Bank of America (BoA), have moved away from their hostile approach towards cryptocurrencies to a more accommodative attitude. And even though the bank said it has no plans to offer crypto services, it still admitted that Bitcoin and crypto are too big to ignore.