Cryptocurrency-Related Stocks: A Diversification Tool within the Framework of Asset Allocation

Bitcoin ($BTC) has gradually established itself as a standalone asset within the framework of asset allocation. Considered by institutions such as

Bitcoin has gradually established itself as a standalone asset within the framework of asset allocation. Considered by institutions to be an excellent diversification tool due to its low correlation with traditional asset classes (stocks, bonds), Bitcoin is attracting an increasing number of investors.

Below, we can see how Bitcoin has behaved during different crises compared to other assets.

However, direct investment in cryptocurrencies comes with significant challenges: high volatility, managing digital wallets, and the administrative complexity of tax reporting for gains or losses. An interesting solution to benefit from the advantages of this market while bypassing these obstacles is to invest in cryptocurrency-related stocks. These stocks offer an indirect alternative to Bitcoin while playing a diversifying role in an investment strategy.

Why Are Cryptocurrency-Related Stocks Diversification Tools?

Stocks of cryptocurrency-related companies occupy a unique position in the investment landscape. They allow investors to benefit from the growth trends of the crypto market without directly investing in digital assets. Like Bitcoin, they exhibit characteristics that make them attractive in a diversified asset allocation:

Main Categories of Cryptocurrency-Related Stocks

Which Stocks Are Most Correlated with Bitcoin?

Certain stocks have a stronger correlation with Bitcoin due to their direct dependence on its performance. For example:

Coinbase (COIN): The trading volumes on its platform vary according to overall interest in cryptocurrencies.

Conversely, companies like NVIDIA or IBM have a lower correlation with Bitcoin as they diversify their activities beyond the crypto market.

It is even possible to closely mimic Bitcoin’s performance by combining several stocks. For instance, a portfolio comprising (MSTR0.3 + MARA0.3 + COIN*0.7)/1.3 closely tracks Bitcoin’s movements.

How to Integrate These Stocks into Asset Allocation

Crypto Stocks as a Complement to Bitcoin in a Diversified Portfolio

Incorporating cryptocurrency-related stocks into an asset allocation can enhance portfolio diversification. While Bitcoin serves as an uncorrelated asset relative to traditional markets, these stocks offer hybrid exposure. They combine the potential growth of the crypto market with more stable fundamentals, thereby reducing some of the risks associated with direct crypto investment.

Our three-year analysis of a balanced portfolio reveals that adding 1.3% Bitcoin had a positive impact on risk-adjusted performance. However, replacing Bitcoin with a basket of three cryptocurrency-related stocks yielded even better results. On the other hand, completely excluding cryptocurrencies led to a significant decline in performance.

Risks of Investing in Cryptocurrency-Related Stocks

Investing in cryptocurrency-related stocks, such as those in mining, exchanges, and blockchain technologies, offers potential rewards but also significant risks:

While offering strong growth potential, these risks require careful consideration and diversification for effective risk management.

Conclusion

Investing in cryptocurrency-related stocks is a smart strategy to benefit from the rise of this sector while diversifying your portfolio. These stocks provide exposure to the opportunities offered by crypto without the complexities of direct management. As a complement to Bitcoin, they strengthen the diversification role of a portfolio and offer attractive growth potential in a rapidly evolving financial environment. However, it is important to consider the risks associated with these investments. Price fluctuations in cryptocurrencies, uncertain regulation, and market volatility can lead to significant losses. Investors should therefore be aware of these risks and proceed with caution when adding these stocks to their portfolio.