How Bitcoin acts as an effective portfolio diversifier

Fundamentally, we understand the role digital assets can play in an investor’s portfolio, generating additional alpha; as a hedge against worldwide financial instability and as a rare, secure, price-inelastic and portable asset. As portfolio managers, the next step is exploring how digital assets can further strengthen a portfolio and explore different strategies to achieve superior returns.

To perform a backtest, we started with a base portfolio of equities (MSCI World Ex Australia AUD) and fixed income (Bloomberg Global Aggregate AUD) for each risk band from Conservative to Aggressive, and experimented with what adding a small allocation to Bitcoin (AUD) did to returns and sharpe ratios. In DigitalX’s view, a five-year lookback period provides a comprehensive window to assess the impact of Bitcoin on a diversified portfolio.

Equity: MSCI World Ex Australia || Debt: Bloomberg Global Aggregate || Digital assets: Bitcoin || All returns in AUD. Returns from May 2018 – May 2024.

The case for adding digital assets to a portfolio could not be stronger:

• Effective portfolio diversifier – no matter what your risk profile; it is clear that adding digital assets to your portfolio provides better returns with higher sharpe ratios demonstrating that digital assets can provide better risk-adjusted returns and act as an effective portfolio diversifier.
• Significant outperformance with rising allocation to digital assets over a 5 year look-back period when compared to a traditional portfolio without digital assets.
• Getting off 0% makes sense for any asset allocator – the superior returns and higher sharpe ratios demonstrate that every serious investor should consider an allocation to digital assets.

As digital asset markets evolve their use in portfolio diversification as a risk asset will also expand – and as the use cases such as real world asset tokenisation grow so will portfolio additions; at DigitalX we are working to create this future.