Bitcoin (BTC) was the all-time performing asset of the decade according to a recent report by Cointelegraph and earlier this week Morgan Creek Capital CEO, Mark Yusko, said that every investment portfolio should have a minimum 1% Bitcoin resource allotment.

Yusko made the comments during an interview with Max Keiser on the Keiser Report, published on Jan. thirty. Keiser also noted that portfolios with a one% allotment to Bitcoin accept also outperformed nearly all other investments of the by five years.

Over the past half dozen years, due to its volatile nature, many investors have taken advantage of Bitcoin's wide price movements. Hence, it has been suggested that a diversified crypto portfolio doesn't offer the advantages that an investor could expect from the application of traditional diversification principles.

Bitcoin's loftier volatility is often interpreted every bit an unreasonable risk to traditional investors and information technology has been i of the key issues preventing established investment firms from considering it as a consistent investment vehicle. However, volatility is one of the primary reasons Bitcoin is able to generate astounding gains to investors.

However, we'll look further into the matter and for those looking to take reward of Bitcoin's behavior without exposing themselves to the risk presented past its volatility we will analyze how several investment baskets equanimous of Bitcoin and traditional assets such as stock indices and treasuries perform.

Cryptocurrency market daily overview

Cryptocurrency marketplace daily overview. Source: Coin360

Defining diversified investment baskets

To determine whether diversified crypto portfolios provide a return that is higher up the average produced by traditional markets merely also does non expose investors to untenable levels of risk, we have analyzed the diversification power of traditional stocks indexes (S&P 500 and Nasdaq Composite), and the Treasury Pecker (10 Year Government Bond) in comparison to investing only in Bitcoin or in a Bitcoin-indexed trust like the Grayscale Bitcoin Trust (GBTC).

Nosotros defined the post-obit investment baskets:

  • Basket Nº1: 50% of Bitcoin and Southward&P 500;

  • Basket Nº2: 50% of Bitcoin and Nasdaq;

  • Basket Nº3: fifty% of Bitcoin and T-Bill;

  • Basket Nº4: 33% of each Alphabetize (Southward&P500 and Nasdaq) and 33% of Bitcoin;

  • Handbasket Nº5: 33% of Bitcoin, Due south&P500 and T-Neb;

  • Basket Nº6: 33% of Bitcoin, Nasdaq and T-Nib;

  • Basket Nº7: 25% of each asset (BTC, Southward&P500, Nasdaq and T-Nib).

Analyzing the period from Jan. 2022 until Dec. 2022, Bitcoin alone offered the best cumulative render (293%) from all the investment options. The asset was followed past a 270% gain from the Grayscale Bitcoin Trust.

From a risk-adapted perspective, Bitcoin shows a 0.98 ratio and Grayscale a 0.67 Shape ratio – considered low values – meaning investors are taking up too much gamble for the return they get from investing in these 2 assets.

January 2022-December 2022 Cumulative Return for Bitcoin and Grayscale Bitcoin Trust

January 2022-December 2022 Cumulative Render for Bitcoin and Grayscale Bitcoin Trust

These two assets will be used as the reference investment options when comparison the performance of the diversified investment baskets.

Diversification basket operation

Looking at the cumulative returns for each handbasket, nosotros conclude that basket Nº2 (composed of 50% Bitcoin and fifty% Nasdaq Composite) offers the best investment option (222%) for the sample period. This was followed by handbasket Nº1 which was composed of l% Bitcoin and l% Southward&P 500.

The 3rd best option consists of investing 33% in each stock alphabetize (S&P 500 and Nasdaq Composite) and 33% in Bitcoin (basket Nº4), resulting in a 192% cumulative return. From a purely return-based point of view, all the diversified options give investors a worse performing strategy than investing solely in Bitcoin or Grayscale's GBTC security.

Interestingly, the worst cumulative returns from the baskets is the ane with more diversification (basket Nº7). This basked consisted of 25% of each asset (BTC, Due south&P500, Nasdaq and T-Beak) and provided a 164% return.

We could be tempted to reconfirm previous reports citing the lack of value in diversified crypto investing, simply in order to reach that conclusion, ane would need to analyze the risk-adapted performance using the Sharpe ratio. This would allow an investor to comply with its risk aversion level.

January 2022-December 2022 Cumulative Return for each Investment Basket

January 2022-December 2022 Cumulative Return for each Investment Handbasket

The data shows that 5 out of the 7 available diversified baskets offer a better chance-adjusted operation than investing in either Bitcoin or Grayscale's (GBTC) trust. Moreover, the best selection is provided by basket Nº4 which has a 1.32 Sharpe ratio and consists of investing 33% in each alphabetize and the remaining 33% in Bitcoin. The options consisting of 50% Bitcoin and 50% of the other stock indexes offer besides adequate Sharpe ratios at 1.20 and 1.14.

Sharpe Ratio for each Diversified Investment Basket

Sharpe Ratio for each Diversified Investment Basket

Diversification ability for investors

It is worthwhile mentioning that in order to develop this analysis, weekends and vacation returns were taken out of the sample in order to construct diversified portfolios as stock indexes are not traded during those days, unlike the cryptocurrency market which is always open.

Despite that adjustment, this analysis shows the benefits of applying traditional diversification principles into the crypto space.

Looking forrard, investors take the risk to take advantage of high-proceeds assets like Bitcoin and showtime their risk exposure past investing in traditional stock indexes to generate superior operation.

The views and opinions expressed hither are solely those of the author and exercise not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. Yous should conduct your own research when making a decision.