Crypto is a unique asset class that can generate phenomenal returns for investors. We’ve all heard the stories of Bitcoin millionaires who invested in the original cryptocurrency during its early days and went on to make millions, and there are plenty more who have benefited by investing in altcoins during the incredible bull runs seen in the crypto industry over the years.
Many investors buy crypto on platforms such as Binance, Coinbase and MultiBank.io not just because they believe it can deliver incredible profits if they buy at the right moment. They also see it as an innovative technology with many potential uses in the real world. Ideas like DeFi can potentially bank millions of unbanked people around the world, while GameFi has also taken off, giving video game fans the opportunity to earn real-life rewards. Given its possible applications, it is likely that the adoption of crypto will continue to grow, and boost the value of many digital assets in the longer term.
However, crypto is also one of the riskiest assets for any investor, even if they are true believers. Few assets can match the remarkable volatility of crypto, where tokens have gone from hero to zero in less than 24 hours – the case of Terra’s UST and LUNA being a good example of this.
Even Bitcoin, the world’s most established crypto asset, has experienced wild price swings that can see it lose more than 20% of its value in one day. What’s more, most crypto assets tend to follow the price movements of Bitcoin – and if BTC has a bad day, altcoins will often be hit harder.
A Balanced Portfolio May Serve Investors Better
The uncertainty around crypto means that many investors might be better served by a more balanced portfolio that includes traditional financial instruments such as derivatives, stocks and shares, mutual funds, commodities, real estate and forex.
These traditional investments might not have the potential to generate the same crazy returns as crypto, but they can still perform very well in the long term. Indeed, the fact they have existed as investment options for decades already means they have stood the test of time, proving not only their long-term resilience but also their ability to generate value. For investors who realize that it’s very unlikely they’ll be able to get rich quickly, it makes a lot of sense to bet on more stable assets rather than go all-in on something as risky as crypto. By carefully balancing their portfolios with crypto and other assets, it’s possible to still enjoy the same rapid gains crypto can potentially deliver, while absorbing any sudden price crashes.
Of course, traditional financial assets have risks themselves. They can also be hit by market fluctuations and economic downturns, but the impact of these negative events is, generally, not nearly as pronounced. They’re also tricky for some investors to obtain, as they’re governed by regulatory frameworks that make them less accessible.
Where Can I Build A Balanced Portfolio?
Increasingly, investors are beginning to understand that a balanced portfolio is the way to go. Luckily, the job of mixing up a portfolio is made easy by all-in-one trading platforms such as MultiBank, eToro and Robinhood, which allow investors to trade both digital assets and traditional instruments such as stocks, bonds and Forex.
Such platforms also help to ease the regulatory uncertainty. MultiBank, for instance, built its reputation in the traditional financial derivatives world before expanding into crypto. The platform has a strong reputation and is highly regulated, having obtained licenses and achieved compliance in multiple jurisdictions, including the U.S. and Europe. Through MultiBank.io, investors have exposure to hundreds of crypto assets, and they can easily switch to MultiBank.fx to explore opportunities in the derivatives market. It provides a single, unified platform for investors to build a balanced portfolio. Should the crypto market go belly up, users can cash out of their crypto positions instantaneously via its novel “panic sell” feature.
Studies show there are good reasons to consider this strategy. While the volatility of crypto is a major concern, mixing it up with traditional assets can help to increase investors’ risk/return ratios and deliver appreciable gains.
For instance, a 2020 study by Fidelity found that traditional portfolios with minimal exposure to Bitcoin (between 1% and 3%) generated substantially higher returns over the long term than standard 60/40 portfolios, without significantly increasing the level of risk to investors. It found that the Sharpe Ratio, which is a measure of risk-adjusted return, was much higher for those portfolios with exposure to Bitcoin.
Improved Risk & Rewards
The main reason to build a balanced portfolio is to limit your risk exposure. Though it can generate sizable returns, crypto can also be a remarkably bad investment if you buy at the wrong time. By balancing your portfolio with digital assets and traditional instruments, the success of your investment isn’t tied to the extremes of the crypto market.
For investors who’re just starting out with crypto, it makes sense to limit your exposure to a tiny part of your overall portfolio. Crypto fanatics may want to retain a much higher exposure, but should still consider putting a substantial amount of their wealth into traditional assets as a hedge against volatility.
One of the downsides is that creating a well-balanced portfolio is a time consuming exercise, as research is necessary to identify the right assets to balance the high-risk nature of crypto. And remember, that even with a well-balanced portfolio, investing is an uncertain business and there is no strategy that gives a 100% guarantee of success.
The post Traditional Assets Are The Perfect Tonic To Hedge Against Crypto Volatility appeared first on Analytics Insight.
Source: https://www.analyticsinsight.net/traditional-assets-are-the-perfect-tonic-to-hedge-against-crypto-volatility/