Are your investments truly diversified? What's missing?
Every investor that wants a diversified portfolio should have exposure to cryptocurrency assets - or digital assets as they are sometimes called. It’s an asset class with more volume each passing year and uncorrelated to the stock market. Additionally, Bitcoin has outperformed the S&P 500 for the past 10 years since its inception. Even Mike Novogratz the Founder and CEO of Galaxy Digital has said every Hedge Fund should hold 1% of their entire Portfolio in Bitcoin as a hedge to the systemic market risks.
In all markets, being correlated with how well the economy is performing has distinct advantages and disadvantages. If the economy is doing well, it often has low unemployment rates, strong productivity and controlled inflation. In these periods of economic boom, it's good to have assets that perform accordingly. But when the economy starts to slow down and sentiment from markets shift, it is important to have a portion of your portfolio that takes advantage of the market downturn. Traditionally this is achieved through derivatives of underlying assets; however, in recent times cryptocurrencies have provided another way to add non-correlated assets to any portfolio.
What is the Modern Portfolio Theory?
From the Modern Portfolio Theory, the return of an asset follows the amount of risk that the asset has, which means that if an asset has a lot of risk then you can expect a higher return. As Thomas Jefferson once said: “with great risk comes great reward”.
Using Modern Portfolio Theory leads to a focus on efficiency. Those who subscribe to Modern Portfolio Theory targeted the best performing assets including bonds, stocks, commodities, and in today’s market, digital assets such as cryptocurrencies and smart commodities. Investors then weigh their allocations on each asset in their portfolio to maximize returns, as well as to hedge their risk by securing assets that have different levels of correlation to the broader economy.
Having digital assets in the portfolio adds a previously unattainable level of asset mix to an investor’s portfolio, in the sense that digital assets are not correlated with the market, because as highlighted before, they have an uncorrelated performance with the stock market. It’s also the first time in history that retail investors can participate in what used to be private offerings to Venture Capital firms. VC’s used to have nearly exclusive access to innovative ideas and new businesses models. These groundbreaking opportunities have been shown to be highly tech concentrated. Primary Market democratization, i.e. the ease of access to innovative ideas and projects through the cryptocurrency and blockchain industry is revolutionary.
But what is uncorrelated with Bitcoin?
With the critical role uncorrelated assets play in modern portfolio theory, it’s important to hold assets that perform in an uncorrelated way to their broader asset grouping. In the digital asset world, we’re currently in a period of time where price discovery is a metric that gets a lot of attention by the media and it outlines an approach that a majority of crypto investors attempt to use to value and evaluate digital assets. Within the digital asset bucket, it's important to have alternatives. This is because historically, virtually all digital assets follow Bitcoin’s price movements closely. Investors in digital assets need to have an alternative to current day cryptocurrencies in order to hedge and perform well when the broader asset class is down. With a redundancy in performance from cryptocurrencies following Bitcoin’s price movements, where can we find a digital asset that performs in an uncorrelated way?
Enter Ampleforth. Ampleforth aims to create a smart commodity-money with units called Amples. Amples are a completely different crypto model that spreads price information into supply. The Ampleforth protocol aims to achieve price-supply equilibrium, but while it's attempting to establish this equilibrium, it creates a window of opportunity called expansion and contraction that market participants can arbitrage to create gains. Finding assets that are uncorrelated with Bitcoin and other market movers is a must in every crypto portfolio, in the same way that crypto is a must in every asset management portfolio.
There are many industries that have the expectation of high returns. High returns come hand in hand with high risk, and modern portfolio theory shows that as investors we must strive to have assets that take advantage of these high returns, while also carrying assets that perform in an uncorrelated fashion as a much needed hedge. Ampleforth’s break from strictly following Bitcoin’s price movements will provide a much needed opportunity for digital asset investors. That is the opportunity to capture the high gains available in the volatile digital asset space, while also providing an asset that performs in an uncorrelated fashion within the class. Ampleforth generates price movements that will at times climb with Bitcoin and at times climb when Bitcoin suffers from one of its legendary price crashes.
Out of all of the industries where investors hope for high returns, where risk and return run hand in hand, digital assets are at the top of the list for many of today’s investors. As the world continues to innovate, and digital assets add to and improve on the options we have for transacting, storing value and even creating new synthetic commodities, it’s important to consider assets that not only capture potential upside, but also include some assets that have their own price movements uncorrelated with Bitcoin, and other digital assets on the whole.