The report provides an industry overview of the prevailing trends over the past few months, providing data on optimizing portfolio allocation and portfolio strategies based on market conditions.
The report concludes that adding exposure to the top five crypto assets based on market cap can significantly improve risk-adjusted returns. They also found that including just 5% large-cap crypto allocation to a portfolio provides a better risk-reward trade-off than a Bitcoin-only portfolio when measured by the Sharpe ratio.
One of the most consequential findings was that when comparing all return and risk measures across different rebalancing frequencies, they found that rebalancing quarterly provided the best trade-off for investors.
Some of the other substantial findings of the report are:
- Crypto assets are risk-on assets– Over the last eight years, bitcoin has maintained a relatively low correlation with the S&P 500 index. In a risk-off environment, bitcoin reached all-time high levels of correlation with the S&P 500. In the short term during uncertain times, correlation levels across nearly all asset classes increase, but longer-term, crypto is relatively uncorrelated and continues to be one of the best performing asset classes of the past decade.
- Adding crypto to an investor’s portfolio improved overall performance– Crypto exposure of across all rebalance frequencies improved annualized return from 9.1% to double digits ranging from 13.9% to 19.7% and enhanced the Sharpe ratio from 1.0 to 1.3.
- Rebalancing mitigates market drawdowns– Rebalancing is an important strategy for portfolio construction as it can smooth out volatility across major asset classes and is especially important for crypto assets due to their higher levels of market swings. Quarterly rebalancing provides the best outcome to reduce volatility to the downside while providing greater potential to capture upside movements.
- Performance does not necessarily correlate with timing the market- Many investors will claim that timing matters in crypto investing, but the data suggests otherwise. It has been shown that the exact time that bitcoin was added to a portfolio is of little impact. 90% of the time, a portfolio with bitcoin exposure outperformed the benchmark in the first year, and 100% of the time, the strategy outperformed the benchmark over the next three years. This suggests that the sooner investors can add bitcoin to their portfolio, and leave it there, the better the portfolio is likely to perform.
Eliézer Ndinga, Director of Research at 21Shares states:
“Between the macro trends driving the market and the emergence of new blockchain-based applications, our financial system as we know it is experiencing a paradigm shift. Even with the current volatility of the crypto market, our research empirically shows that portfolios with crypto assets outperform traditional portfolios. We’re continuing to see more use-cases for crypto and greater adoption — particularly from companies and institutions — who have come to realize how strongly the asset class performs long term despite ups and downs.”
The full report along with additional in-depth research can be found by visiting: 21shares.com/research