If even a highly authoritative British financial weekly like The Economist in its latest issue devotes a lengthy article to explaining how Bitcoin and cryptocurrencies could be a good form of diversification for investors, perhaps it is a sign that digital currencies are really starting to be cleared through customs and may indeed be ready for greater adoption.
The Economist explains why Bitcoin end Ethereum are good investments
According to The Economist, in its 25 September issue, cryptocurrencies could be a good choice when it comes to diversifying one’s investments.
To reinforce this thesis, the famous weekly magazine in the City quotes Nobel Prize-winning economist Harry Markowitz’s, who years ago explained how having a mixed portfolio of less-risky and more-risky assets, just like Bitcoin, should be a must for higher average returns on one’s investments.
And it was thanks to the development of this theory that Markowitz won the Nobel Prize for Economics in 1990. The Economist then revived the well-known economist’s theory to adapt it to our current times and portfolios, which increasingly also see the presence of digital currencies, still considered to be among the most volatile and risky assets.
But in spite of their high volatility, the British newspaper explains how in the medium-term investing in Bitcoin and Ethereum and in the main digital currencies has been one of the most profitable returns by far.
The results reported by the English newspaper show that even during the bearish 2018-2019 crypto market period, a portfolio with a 1% allocation to Bitcoin would still have offered a higher risk-return option than one without.
The correlation between crypto and other financial markets
For some time now, attempts have been made to analyze and understand the correlation between cryptocurrencies and other traditional financial markets. Until now, as The Economist article rightly points out, this correlation has been quite low. Because it is a new and innovative asset, it was difficult to find a direct correlation with the bond or stock market.
As the Economist writes, with precise financial data to back it up, over the last three years, the correlation between Bitcoin and stocks across all geographies has been between 0.2 and 0.3. Over longer time horizons it would be even weaker. Its correlation with real estate and bonds would be equally weak.
What seems certain is that Bitcoin increases its attractiveness in those countries with major problems of high inflation, such as most African, Central American, and some South American countries with Venezuela and Argentina in the lead.
However, as yet there is no clear and precise correlation between digital currencies and the interest rate decisions taken by the world’s central banks.
It is also difficult to assess a direct correlation between Bitcoin and what many believe could be its likely future adoption, namely the ultimate store of value: gold.
Bitcoin vs traditional finance
The fact that Bitcoin was born in 2009, after the 2008 financial crisis, precisely to create a currency that was not under the control of regulators, banks and financial institutions, has always created a very difficult relationship between digital currencies and the world of traditional finance.
The world’s major central banks, like the big business banks, immediately warned of the dangers of investing in such a risky and unregulated asset.
Last week, China banned cryptocurrencies throughout the country, causing an immediate collapse in prices. The Fed has also been very cautious about such financial instruments.
The relationship between traditional finance and cryptocurrencies seems to be indirectly related to the enthusiasm it arouses in investors.
However, the climate seems to have changed over the last few years, at least as far as the big investment banks are concerned, which are still looking at cryptocurrencies as an investment asset that can provide significant returns.
Three Bitcoin futures were listed on the CME in 2019, and about 20 ETFs have been submitted to the SEC for about a year now, still waiting for the green light from the regulators of the American stock exchange.
It is precisely this new climate around cryptocurrencies and their ever-increasing attractiveness, also on the part of large institutional investors, that is convincing many central banks to develop state digital currency projects that can in some way be considered as a regulated and controlled alternative to the spread of traditional cryptocurrencies.