Are Crypto-investments Really a Good Investment?

Many trader ask themselves if investing in cryptocurrencies is a good investment. Ciaran Ryan (Moneyweb) wrote an article on the reasons why an investment in cryptocurrencies is indeed profitable. According to Ryan, a crypto-investment combines four advantages that are difficult to find in other investments. The advantages are the following:

1. High potential returns. Bitcoin is up over +60,0% year to date, Ethereum over +200,0%, and the entire crypto market over +1,000% over the past 3 years. While that’s no guarantee that this past trend will continue, cryptocurrencies’ 10-year track record suggests the uptrend may go on, and many traders believe it’s just getting started. Lesser-known cryptocurrencies including Chainlink (+850%) and Cardano (+290%) have begun to challenge Bitcoin’s dominance.

2. Extremely low correlations to other investments. Cryptocurrencies have little to no correlation to other investments. There’s a good reason for this low correlation: like commodities, crypto has different drivers and risk factors. User adoption, blockchain processing speeds and regulatory developments are key to determine cryptocurrency prices, instead of typical macroeconomic variables (e.g. GDP growth rate, interest rates and unemployment) which shape the returns of traditional investments.

3. Liquidity. Most alternative assets are illiquid, meaning that a trader cannot sell out of them quickly or easily. Cryptos, instead, trade 24/7, 365 days of the year. There are no lock-up periods like with most investment funds.

4. Risk-adjusted returns. If we look at what would happen if a trader added just a 1.0% crypto allocation to a traditional portfolio made up of 60% stocks and 40% bonds, the results are actually quite remarkable. Despite the extreme volatility cryptos have shown since 2017, a 1.0% crypto allocation over this period boosted the portfolio’s returns by +21.15%, while only modestly increasing the portfolio’s volatility. It may seem counterintuitive to suggest that a volatile asset class like cryptocurrencies can significantly boost overall portfolio returns with little added risk. But the answer lies in the uncorrelated returns and the daily liquidity that crypto offers. Adding uncorrelated assets to a portfolio tends to reduce risk. But adding liquid uncorrelated assets magnifies that impact because it allows a trader to rebalance the portfolio.

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