If there’s one idiomatic refrain that finds its relevance in the context of investment portfolio diversification, it is definitely – ‘Don’t put all your eggs in one basket’.
While traditional assets like stocks, bonds, and real estate generally fall under the safe investment category, asset diversification is what could truly serve as a protective shield to an investor’s portfolio. If a single asset class takes a major hit or performs poorly, a diversified portfolio with other asset classes to fall back on instead of solely relying on one has the power to protect you from enormous losses. It can also foster more flexibility while entering and exiting the market as it provides more stable returns.
Having said that, however, it is important to mention that no single asset class is ever fail-proof and is of course vulnerable to loss. A sensible way to mitigate investment risks therefore is to have your investment portfolio stand as a mixed bag of asset classes. So what other asset classes can investors consider to diversify their portfolio?
Cryptocurrencies have taken center stage with the meteoric rise of digital assets over the last decade, and from an investor perspective have been seen to add significant value to portfolios by enabling them to be risk-averse. A balanced mix of assets is a much safer bet and tends to generate higher returns while also reducing losses. What seems to be continuing to solidify the crypto trail is some of the world’s Bitcoin millionaires leading the way in showing how cryptocurrencies are truly investable assets.
Here are some factors that make the case for investing in cryptocurrencies as part of your overall portfolio:
One of the primary benefits of diversifying your portfolio with crypto is risk mitigation, despite the crypto asset class by itself being volatile. Cryptocurrency as a digital asset class has the potential to perform in a way that can balance out any risks posed by other stable asset classes. Research points to how investing in Bitcoin can mitigate overall risk as compared to traditional stocks. Cryptocurrency finds its place as a suitable alternative investment and is making significant headway in mitigating risks that are characteristic of traditional bonds and stocks.
Immunity to inflation:
A nagging issue that clouds every asset class, particularly the money chain, is centralization and increased regulation. With decentralization to their advantage, cryptocurrencies as digital assets are immune to inflation and are a close second to gold as a preferred investment option given their stable inflation rate. They’re not directly regulated by government bodies or authorized financial banks, which helps eliminate roadblocks that are typical of the banking system. Due to their open-source and decentralized nature, cryptocurrencies are more immune to risks associated with fluctuating price dips.
Given that they’re a decentralized asset class not tied to any one single authoritative body, cryptocurrencies are entirely independent in their function. This also means that cryptocurrencies enjoy a fair share of value and independence as they don’t shrink in direct correlation with other asset classes. Just this aspect in itself makes them a significant value add to a hedged or fully balanced portfolio.
Stability and better regulation:
The 2008 global financial crisis exposed the world’s financial system through its gaping holes and prompted several investors to look at alternative investments in a bid to tackle the crisis. As a result, the cryptocurrency landscape began dynamically evolving; and the cloud of uncertainty around crypto markets continues to gradually clear up with a reasonable regulatory framework being put in place. Although there is no global regulatory body governing the laws of the market, each country across the globe is now taking notice and devising steps to regulate Bitcoin and other cryptocurrencies with consumer protection as the unilateral goal. Another development that favors the growth of the crypto market is The Office of the Comptroller of the Currency (OCC) letting all nationally chartered banks in the U.S. provide custody services for cryptocurrencies. This is a huge milestone in the regulatory direction since it removes major roadblocks to cryptocurrency investment. Several major technology giants have also expressed a clear interest in accepting crypto payments as legal tender with Elon Musk being the latest to jump on the bandwagon.
Easy entry and exit:
Cryptocurrencies enjoy the benefit of hassle-free entry and exit into the investment market. Much unlike markets for several other assets, the cryptocurrency market does not mandate investors to be armed with a lot of money while entering the market. Since everything can be quickly set up online, investors bypass the trouble of paperwork which is normally standard with other investment classes. A quickly setup online account with a linked wallet is all it takes for easy and meticulous tracking of all your crypto assets.
When looking to add value to their portfolios, practical investors can do themselves a world of good by considering the cryptocurrency route. A good example to consider is how Bitcoin, in spite of being a volatile asset class, has not displayed a remarkable correlation with other traditional asset classes. Although there is divided opinion on the risks of crypto diversification outweighing its benefits, there is some evidence to show that early adopters can reap rich dividends with diversifying into the crypto class.