The study also concluded that a temporary decline in the crypto market and volatility are insufficient to diminish the importance of cryptocurrencies in investment portfolios.
Allocating funds to cryptocurrency investment positions has been shown to improve the performance of diversified investment portfolios.
According to a study conducted by crypto asset management firms Iconic Funds and Cryptology Asset Group, the ability of crypto investments to positively impact the performance of investment portfolios spans multiple asset allocation models.
Despite its volatility, particularly the recent market crash in May, cryptocurrency has the potential to improve the profitability of diverse investment portfolios.
The study, titled “Cryptocurrencies and the Sharpe Ratio of Traditional Investment Models,” looked at how the risk-return profile of several portfolio allocation methods changed as cryptocurrency assets were added.
When crypto positions were included in the various asset portfolio models, changes in the Sharpe ratio — a measure of excess returns earned for holding a volatile asset — were measured.
Because cryptocurrencies are ostensibly an uncorrelated asset class, the risk-reward performance of investment portfolios should improve with their inclusion, despite their apparent volatile price movements.
The study mapped the changes in the Sharpe ratio for traditional portfolio models with the addition of crypto exposure against a reference index with no cryptocurrency allocation, assuming a passive investment strategy.
The study also rebalanced the cryptocurrency allocation on a 1%, 3%, and 5% basis to investigate the impact of increasing the crypto positions for each portfolio model.
“This report finds that the addition of cryptocurrencies to any portfolio covered had a positive impact on the returns as well as the risk-reward performance of the portfolio,” the study stated, adding:
“This finding holds true despite a significant correction in the crypto markets at the start of 2021.” In addition, the addition of more cryptocurrencies resulted in even higher returns.”
According to the document, the findings of the 2021 study lend credence to the conclusions reached in the 2020 study, which demonstrated the positive impact of crypto allocations to investment portfolios despite the mid-March market crash.
Crypto exposure is becoming increasingly popular among institutional investors. According to a recent Bank of America report, 20 major publicly traded companies in the United States have significant digital asset-based investments.
According to a September survey conducted by European investment management firm Nickel Digital Asset Management, 62 percent of global institutional investors with no crypto exposure will begin exploring cryptocurrency and blockchain within the next 12 months.