The Effects Of Diversifying With Cryptocurrencies

SummaryStarting point: the traditional 60% equity and 40% bond portfolio.We explored the results of integrating 5% of Bitcoin into a traditional portfolio.One would expect the modified portfolio to indeed have higher returns, but also much higher risk levels.The results: While the returns of the modified portfolio with Bitcoin improve substantially, the risk in terms of volatility and maximum drawdown only increases marginally.Editor's note: Seeking Alpha is proud to welcome Vittorio Bertolini as a new contributor. It's easy to become a Seeking Alpha contributor and earn money for your best investment ideas. Active contributors also get free access to SA Premium. Click here to find out more »In this article, we'll explore the results of integrating 5% of Bitcoin (BTC-USD) into a traditional portfolio.The traditional 60% equity and 40% bond portfolioThe notion of efficient portfolio management is based in modern portfolio theory. The work on this theory was done by Nobel Prize-winning economists such as Harry Markowitz, William Sharpe, and Eugene Fama. Since this seminal work, the "60/40 portfolio" has long been revered as a trusty guidepost for a moderate risk investor - a 60% allocation to equities with the intention of providing capital appreciation, and a 40% allocation to fixed income to potentially offer income while mitigating risk.For the purposes of representing the "traditional portfolio," we have chosen two ETFs from...