Since the global financial crisis of 2008 hit the economy hard, there is only one mantra that the financial advisors have been chanting to their clients. It is the Diversification of Portfolio.
Diversifying your portfolio means spreading your investment across varied assets. It is essential for the long-term success of your portfolio.
Generally, people turned towards traditional assets like stocks, gold, bonds, and monetary instruments for diversification.
But the persistent market instability and falling interest rates have failed to generate significant returns for the investors in recent years.
How can you beat this?
Perhaps, Cryptocurrencies are something interesting to look at here:
Cryptocurrencies are the new and most sought after tool for portfolio diversification that is winning returns. Since its inception, cryptocurrencies like Bitcoin have also evolved into a potential store of value in the past decade.
Cryptocurrencies: A Tool for Portfolio Diversification
Cryptocurrencies like Bitcoin are created digitally and are limited in supply.
They behave differently and are low or non-correlated to fiat currencies or other traditional assets like stocks or bonds.
The recent economic crisis has demonstrated this; while the traditional markets were crashing, the value of cryptocurrencies stood steady first and then rose too, as we have seen.
Some successful investors, such as Chamath Palipathiya, CEO of Social Capital, believe that everyone must hold at least 1% of Bitcoins in your portfolio to shield it from erosion via inflation.
A study revealed that just 1% holding in Bitcoins could be enough to expose you to the benefit of diversification without significant risk to your portfolio.
That is, 1% Bitcoins, 59% Stocks, and 40% Bonds rather than only 60% stocks and 40% Bonds can reduce portfolio risk in terms of returns and asset allocation.
Do you see where we are going with this? Let me also handout to you the reasons you should consider diversifying your portfolio with crypto:
1. Cryptocurrency: Price and Value
Bitcoin prices have been skyrocketing for a while now. Since its inception, it has been known to return more than 9,00,000% returns to their pioneers in just a decade.
But most investors are interested in what is the price now? And how much will I get in 6 months? Or how much will it increase in 2 years?
While the answers to these questions are unknown, I can tell you for sure that it ultimately holds value.
Humanity is now dealing with an utmost scarce instrument. Even gold can be replenished, but Bitcoin is capped to 21 million BTC.
And with more people realizing it, the demand for Bitcoin is going up. In fact, institutional investors are buying their share of different cryptocurrencies as a hedge against a financial crisis in the future.
2. A Hedge Against Market Risks
We are still facing the harsh reality of the financial crumble that the pandemic has brought about.
When the whole country was under lockdown, the economy took a tumble, and businesses came to an end. Even now, the fear of virus is keeping people from going out and hence affecting many industries.
A rise in commercial borrowings has led to an increase in India’s total debts by 2.8% in March 2020 alone.
Increasing debt can be settled in two ways, one by defaulting or printing more money. The latter is most likely to happen—more money in circulation results in the currency’s devaluation and, ultimately, inflation.
Cryptocurrencies like Bitcoin are a hedge against inflation.
Their limited supply makes it naturally deflationary. Also, since some cryptocurrencies can also be used as a medium of exchange, it may be a great resource just in case our existing financial system collapses overnight.
3. A New Alternative Asset Class
Alternative assets are those assets that do not fall under the traditional asset classes such as stocks, bonds, and cash instruments.
These assets play an essential role in the diversification of the portfolio and reducing the impact of market shocks.
Generally, people invest in gold, real estate, etc., as an alternative investment.
Recently, the exponential returns of crypto assets have attracted many investors. The limited supply and low correlation with equity markets make it a good substitute for investment in times of economic turmoil.
So it all adds up to this:
Cryptocurrencies are an asset class that can diversify the risk in your portfolio. Since it is a young market, it may not be a good idea to invest everything into cryptocurrencies.
But holding a percentage of crypto assets has proven to increase the overall portfolio’s health, so bet accordingly and make sure to learn with KuberVerse.
[su_note] KuberVerse is an educational initiative. Anything expressed here directly or indirectly is not investment advice. And we ask you to do your own research before investing. [/su_note]
Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.
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