The crypto market has dominated the headlines for the past few months. Bitcoin hit a new record in February at over 45,000 euros. In the last three months alone, the mother of all cryptocurrencies has achieved a performance of 160 percent — no other asset class has succeeded in this.
In particular, HNWIs, i.e., high-net-worth individuals (wealthy private customers) in the care of family offices, were able to benefit from this extraordinary development due to their early involvement in the crypto market. But where does this early interest in the new asset class come from?
Diversification is the key to success when investing. In order to achieve a positive effect on the risk/return ratio in the investment portfolio, the correlation between individual investments in the portfolio must be as small as possible. The correlation coefficient of crypto values and classic investment products such as the American stock index S&P 500 increased in the past year but is still in the green area. To date, there is no other asset class with similar financial mathematical characteristics.
Investors should keep one thing in mind: the global hot spots have not diminished in recent years. The massive national debt in Asia, political tension in the Middle East, the trade war between the USA and China, or the ongoing Covid-19 crisis are causing great uncertainties. When it comes to the number of potential market risks, everyone should diversify as broadly as possible. And crypto stocks offer an attractive option.
Even a small shift of the private assets of HNWIs into crypto stocks can significantly increase the earnings opportunities. The percentage allocation depends on the risk appetite of the respective investor or asset manager. So far, between 1 and 7 percent of the total portfolio value has been invested.
Adding crypto assets is the first step. In the second step, investors must pay attention to intra-crypto diversification. According to some studies, a sufficiently high diversification effect is achieved when the portfolio has between 10 and 15 crypto values. An expansion to more is, of course, possible but has little effect on the idiosyncratic portfolio risk. The exciting thing about crypto values is the asymmetrical distribution of risk. In the classic financial market, the motto is: “More risk, more opportunity, and vice versa.” This principle does not apply to the crypto market.
The risk-reward ratio is not in balance. The risk stagnates at a comparatively high level, whereby the potential return can be extremely high. Returns of x20, x100, x200 are not uncommon — as incredible as that may sound. Economists from Stanford also found that crypto stocks offer a significantly more attractive risk-return ratio (Sharpe ratio) than stocks or bonds. Family offices take advantage of this property by investing small amounts in their clients’ portfolios, which can be responsible for a large part of the performance.
In the current market environment, it is becoming more and more of a challenge to construct a balanced portfolio. Family offices are considered conservative, but the so-called value preservation approach is an important principle — that is, inflation should be beaten. Since this goal is difficult to achieve due to a lack of profitable investment opportunities, it is again advisable to enrich the portfolio with crypto values. That increases the likelihood of beating the adjusted inflation rate. Here, too, economists recommend a portfolio weighting of 1 to 6 percent.
In addition, the current development in the financial market suggests that crypto values will be anything but a short-term trend. The use cases are limitless. There is hardly a company that does not deal with the technology. This creates further opportunities for future price increases.
P.S. You Can Support me For Free Through ALL of these Links and earn some Crypto/Money Yourself! https://allmylinks.com/zealdorn
Disclaimer: These lines are not a substitute for investment advice, investments in the crypto market are made at your own risk. Invest only as much as you are willing to lose. I get commissions for purchases made through links in this post.