Most investors are aware of the potential for explosive returns with cryptocurrencies, but there’s another reason why they might deserve a home in your portfolio …
Too much concentration in your portfolio can be dangerous.
Investors overly-concentrated in airline stocks have experienced this first-hand in the last two weeks.
As you likely know, the spread of coronavirus has global investors worried about the hit on profits for airlines. This has led to huge selling pressure on airline stocks.
The ETF “JETS” holds the biggest airlines in the world — Southwest, Delta, American, United, JetBlue, you name it.
Over the prior two weeks, through Friday morning as I write, JETS has cratered 25% compared to the S&P’s 15% decline.
Earlier this week in the Digest, we talked about the pain many investors feel when their portfolios are performing worse than the market. How would you like being down 67% more than the market right now?
So, how does an investor prevent this?
You’re probably already way ahead of me … Diversification.
In other words, you spread your wealth over a wide array of different assets. This is Investing 101.
But what might surprise you is which asset class has recently proven to be a powerful diversifier …
If you’ve been following Matt McCall and his research in the crypto space, you know there’s a lot to be excited about today. After all, historical crypto performance suggests the upcoming halvening this spring could bring gains in the thousands of percent to bitcoin and elite altcoins.
But today, let’s look at a less-discussed reason to own some cryptocurrencies — their role as a diversifier in your portfolio.
As you’ll see, since the coronavirus reared its head roughly nine weeks ago, having some of your wealth in quality cryptocurrencies would have left you in far better shape than having your money 100% in the stock market … and this is true despite crypto’s increased volatility and recent pullback.
Today, let’s jump into the details.
***The crypto space isn’t just about moonshots
Ask your average investor why anyone should own a cryptocurrency and the answer will likely boil down to one thing — a chance to hit a homerun and score an outrageous return, potentially, thousands of percent.
To illustrate, here’s Matt from his service, Ultimate Crypto, discussing the returns of bitcoin and various altcoins during past halvenings.
(If you’re new to the Digest and aren’t sure what a halvening is, it’s a unique event in the crypto world in which bitcoin “miners” see their reward for mining new bitcoin cut in half. Huge gains have surrounded the past two halvening events.)
Returning to Matt:
Looking back over the last two halvenings, investing in specific altcoins would have made significantly more money.
During the same period in which bitcoin climbed 4,500% surrounding the second halving, an altcoin called Einsteinium shot up over 580,000%. That’s 129 times the gains bitcoin made investors during its massive run. For perspective, that would have turned $5,000 into $29 million. Talk about a life-changing investment.
If that doesn’t excite you, try this: Another altcoin called verge shot up over 63,000%. That’s more than 630 times your investment!
But the potential for moonshot returns isn’t the only reason to own cryptos today. Let’s return to the lesser-known benefit of how cryptos can help diversify your portfolio.
***The nuts and bolts of diversification
When you have a diversified portfolio, you own different assets that respond to various market conditions in different ways. One zigs while another zags. In other words, you want assets that are uncorrelated — they don’t all rise or fall in unison.
Back to Matt:
The current market environment highlights more reasons why cryptos should be part of a well-diversified portfolio. First, of course, is the potential to make a lot of money off them …
Second, cryptos’ performance is largely uncorrelated to the stock market. That means the sector doesn’t trade in sync with the market. It trades mostly on its own. Right now is a great example of what cryptos can add to a portfolio.
So, what is Matt talking about?
Well, CIX100 is a basket of the 100 largest crypto-coins in the market. As of Matt’s issue that published on Tuesday, the CIX100 was up 16.4% over the prior 30 days. Over that same period, the S&P was down 5.25%.
One zigs, the other zags.
If we zero in on bitcoin specifically, comparing it to the S&P, we see another illustration of widely-variant returns.
Chinese authorities originally reported the first coronavirus case on December 31. Below, you’ll see bitcoin’s market performance compared to the S&P 500 since then.
While the S&P is down 10%, bitcoin is up 20%.
We see the same correlation benefit (or “lack of correlation” benefit) if we look at smaller altcoins.
In Matt’s Ultimate Crypto portfolio, he currently holds six altcoins. As of his new issue on Tuesday, these coins were up an average of 32.8% in just seven weeks — and again, that’s while the S&P has been suffering.
As I look at Matt’s portfolio here on Friday morning, all the recommendations are still up, and I’m still specific gains of 94%, 31%, and 26%, among others.
***Now, let’s be clear about the point we’re making …
A crypto skeptic will say “fine, cryptos may still be up, but they’ve pulled back substantially in the last few days.”
That’s absolutely true. And it’s a reason why any investor’s allocation to cryptocurrencies needs to be sensible, and in keeping with his/her risk profile.
But a few additional responses …
One, while it’s fantastic that Matt’s crypto recommendations are doing so well collectively, the point of today’s Digest is that they’re performing independently of the broad stock market — again, the diversification element. The fact that cryptos have pulled back over the last week or so in no way diminishes this.
Two, volatility in the space should hardly be a surprise. That’s the nature of this asset class. Plus, by definition, you can’t separate downward volatility from upward volatility.
It’s funny how people tend to equate “volatility” with “falling prices.” But volatility simply refers to the variance of returns — so, there’s also “good, upward” volatility (which no one complains about) … and cryptos have had a lot of that so far in 2020.
As we noted in a Digest last week, as of earlier in February when bitcoin was pushing 42% higher on the year, many altcoins were enjoying even bigger gains. At February highs, Bitcoin SV had popped 209% since the turn of the year. Bitcoin cash tacked on 113%, and dash added 195%. Meanwhile, crypto-favorites Ethereum, Ripple, and Litecoin tacked on 60%, 47%, and 78% respectively, as of earlier this month.
If we’re going to enjoy this type of upward volatility, we have to be prepared for the inevitable downward volatility too.
***The homerun potential of altcoins
Even though today’s Digest is intended to highlight the diversification benefit of cryptocurrencies, let’s end with a hat-tip to the primary reason we own them — the potential for outrageous returns.
Where do we stand today with that?
Back to Matt:
All signs continue to point to higher crypto prices in the coming weeks and months, no matter what stocks do …
People in the know are getting ready for the halvening that will occur in mid-May, just as we are. But most investors are still in the dark. As the buzz picks over up the next couple of months, there is a great chance that bitcoin will rally through its all-time high set in 2017. That would be a 100%+ gain from today’s prices.
Why am I talking about bitcoin when it is not even in our Ultimate Crypto portfolio? Well, as goes bitcoin, so go a lot of the altcoins. Bitcoin is up about 30% this year, when many altcoins are up more … and some up well into the triple digits.
If history repeats itself and bitcoin rallies into and through the halvening, smaller altcoins will do even better. That’s why we have six top-rated altcoins in the portfolio … and why they have outperformed bitcoin since the creation of the portfolio.
Matt is so bullish on his altcoins that’s he raising his buy limits on several of them. You see, Matt’s initial recommendation timing was spot-on, so in the days following his recommendations, his altcoins blew past his buy-limit prices.
But given his continuing research in the space, Matt is bullish enough to up the buy-price for some of his coins. That, combined with this recent pullback, makes four of his coins actionable at the time of this writing. To learn more, click here.
Stepping back, the last few days in the market illustrates why a diversified portfolio is needed to help reduce portfolio drawdowns and soothe frayed nerves. And it turns out, the crypto world offers such a diversification benefit … on top of its homerun potential.
If you haven’t considered a small allocation to altcoins for your portfolio, give it a look.
Have a good evening,