Barry Silbert’s Grayscale Investments believes digital assets conform to successful trading strategies and should form part of beta portfolios.
Digital Assets ‘Fit Squarely’ With Portfolio Success
That’s according to a new research paper from the investment giant, which claims digital assets fit into the risk-return model known as Modern Portfolio Theory (MPT) the same as traditional commodities do.
“Our motivation for creating this paper was twofold. First, we wanted to stress-test our hypothesis that digital assets fit squarely within Modern Portfolio Theory, a time-tested and proven approach that many investors are using today to build better portfolios,” associate Matthew Beck explains.
Second, we wanted to share our analytical framework with those who might benefit from understanding it to determine the optimal digital asset allocation within their own portfolios.
MPT involves a process of risk estimation which Grayscale says is “incredibly valuable” for longer-term investment plans.
While digital assets such as Bitcoin continue to gain scorn from many legacy finance sources, they can in fact improve the portfolio of investors following the MPT model, Beck says.
A ‘Free Lunch’
As such, diversifying into digital assets provides them with a “free lunch” and improve the efficiency of beta portfolios without undermining the risk element.
“That’s because (i) digital assets represent a brand new investment opportunity that is uncorrelated to other asset classes and (ii) investors are generally under-allocated to this sector,” the paper continues.
It is our view that the optimal beta portfolio lies somewhere higher than what was previously believed to be the efficient frontier, and digital assets are the proverbial ‘missing piece of the puzzle.’
The chart above shows average rolling one-month correlations ranging from slightly negative to slightly positive, with an average correlation of zero.
“This provides evidence that digital assets can be considered a diversifying component in multi-asset portfolios,” Grayscale concludes.
Moreover, many digital assets are imperfectly correlated to one another, which means there may even be diversification benefits within the asset class itself.
Grayscale continues to involve itself activity in investment tools for various digital currencies. In May, the firm announced a dedicated investment trust for Ethereum Classic, the original fork of Ethereum championed by founder Silbert.
Later that month, managing director Michael Sonnenshein said Bitcoin’s own future depended on its continuing to stay relevant in a changing landscape.
“It will either survive and become all these amazing things that we think it can be, which will cause its price to be a lot higher. Or it is possible something else may come along that will displace it and Bitcoin goes to zero,” he told Fortune.
“It likely will have a binary outcome.”
What do you think about Grayscale Investments’ assertions about digital assets? Let us know in the comments section below!
Images courtesy of Shutterstock, grayscale.co