Crypto Decrypted

21Crypto as Diversification in a Total Portfolio

All total portfolios are looking for diversification of noncorrelated assets, which would include U.S. stocks, developed stocks, developing stocks, alternative assets (like gold, real estate, and commodities), bonds, cash, and crypto. In this chapter, we'll look at using crypto as a small percentage of a total diversified portfolio. We will also address how smart investors deploy crypto through hedging, buy and hold, and active versus passive strategies. As famed investor Jim Cramer says on his CNBC show Mad Money, “Diversification is truly the only free lunch.” We don't agree with a lot of what Cramer says, but on this point we are truly aligned.

Two of the best books I've read on portfolio diversification are David Swensen's Pioneering Portfolio Management and Unconventional Success. In those two books, he talks about how he changed the endowment fund model to add more alternative asset classes into the total portfolio he was managing for Yale University and how he achieved market‐beating returns. The key component is diversification. Investors want to add asset classes that have lower correlation to one another to improve risk‐adjusted returns – and it works.

Diversification is helpful because different asset classes react differently to market dynamics. For example, stocks (an asset class) react differently to inflation or economic growth than bonds do.  The same goes for real estate. The appreciation of real estate (an asset ...