Dec 17, · Need to Know As bitcoin busts out new records, these market watchers see $, and even $, on the horizon Last Updated: Dec. 17, at . We aim to ascertain the magnitude and robustness of diversification gains for an already diversified portfolio due to inclusion of Bitcoin from the standpoint of an Indian investor. We use eight indices to build a portfolio spread across six asset classes, namely, equity, fixed income, commodities, real estate, gold and alternative investments. While Bitcoin and Islamic equity markets has grown in popularity, the existing literatures has so far overlooked the potential role of Bitcoin as a form of diversification for Islamic investors. This paper intends to fill the literature gap by looking into potential diversification of Bitcoin in the Islamic equity markets.
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The main purpose of exposure to different asset classes is to balance risk and return in a portfolio. In the cryptocurrency space, diversification could also be one of the ways to manage risk exposure. However, some would argue that it is impossible to diversify a crypto portfolio due to the fact that major altcoins are highly correlated with Bitcoin.
However, with a carefully selected basket of altcoins — in conjunction with stablecoins — investors could able to navigate the market more effectively with manageable risk. There has always been a debate about putting all your eggs in one basket. While in some cases concentrating on only one asset could maximize profitability, this also maximizes the risk exposure. On top of that, a heavy-concentration strategy gives investors no room for any errors in analysis, and it overexposes the investor to unnecessary risks.
However, over-diversification could also hurt investment returns. It could increase investment cost, add unnecessary due-diligence efforts and lead to below-average risk-adjusted returns. Once again, this shows various crypto assets could perform very differently, highlighting the importance of balancing risk and return. A portfolio with a balanced selection of coins and tokens could help Hodlers balance risk and returns. Here are some sample portfolios using BTC alongside other leading altcoins as well as the Fundstrat Crypto 40 Index — a weighted index tracks the top 11 to 50 cryptocurrencies by market value and liquidity.
The results could make Hodlers think again about putting all their eggs in one basket. Still, the gain of this portfolio was very close to the one without USDT. In general, a portfolio that includes stablecoins can reduce the risk ratio more than one that is unhedged, but as the examples above show, it is still possible to achieve similar results.
Stablecoins are especially important in portfolios that include highly volatile coins and tokens, as can be seen in the example of the hedged basket.
In contrast, the mixture of BTC and certain altcoins without a stablecoin in the basket could underperform the other sample portfolios provided. Additionally, experienced traders and Hodlers are able to fine-tune their portfolios by adding derivatives on top of a long-only portfolio.
For example, if a Hodler is being short-term bullish on an individual coin, he can increase his leverage on that specific coin by adding futures or perpetual swap positions on top of the holdings. Structured products can also be used as a hedge in a downturning market. Crypto asset diversification has been one of the most debated topics in the industry. However, a BTC-only portfolio will never able to capture the distinctive opportunities in the altcoin world, which could potentially generate higher returns — and, of course, putting all your eggs in one basket comes with higher risk.
A carefully designed portfolio with balanced asset allocation could maximize the risk-adjusted return. As the year-end approaches, investors and Hodlers can review their risk profiles and adjust their strategies for next year. This article does not contain investment advice or recommendations. Every investment and trading move involves risk, you should conduct your own research when making a decision. Volatility notwithstanding, this virtual currency also carries little correlation with other asset classes investors may hold in their portfolio, including stocks and bonds, Edelman said.
Making a tiny allocation toward bitcoin doesn't absolve investors of the need to do their homework before buying, say experts. They should get schooled on digital assets, as well as the underlying blockchain technology, first. More from FA Playbook: Blockchain's potential will continue to spur investment How much investors should invest in alternatives Are collectibles good investments or just hobbies?
Finally, don't forget that if investors acquire, sell or exchange cryptocurrency, they'll need to report it to the IRS. The tax agency treats bitcoin holdings as property, the same way it would regard stocks and other investments. Cryptocurrency exchanges may provide investors with a Form K detailing capital gains and losses, but there is no guarantee that they'll get one. That means it's up to bitcoin owners to track their basis — their original investment in the virtual currency -- and their transactions for accurate tax reporting.
Skip Navigation. Markets Pre-Markets U. Key Points. Price volatility notwithstanding, virtual currency is here to stay, said Ric Edelman, founder of Edelman Financial Engines.