Should you add cryptocurrencies to your portfolio?

02 Feb 2021

Scenario #1: If you want exposure to price movements in cryptocurrencies without holding any.

#1 Protect a portion of your assets from inflation

The latest rally in cryptocurrencies is arguably due to a wave of institutional interest. The volatility of Bitcoin however, tends to make its addition to any portfolio a relatively difficult affair to justify to shareholders, colleagues, or any other stakeholders in so-called institutional investors. Why are they buying it now?

The simple answer is this:

In 2020 alone, the USA has printed around 23% of all US Dollars ever created just to combat the economic fallout from Covid-19.

Pictured: Headlines from Bloomberg, Reuters, and Bloomberg Businessweek respectively

#2 Allocating a portion of your portfolio to cryptocurrencies can boost portfolio yield

If managed correctly, cryptocurrencies can boost your portfolio yield even if you buy at all-time highs.

You can test it out yourself – a small weightage of around 2.5% – 5% of Bitcoin in your portfolio, bought at all-time highs, would return the following with the current price of Bitcoin in 2021.

YearDate of Highest Price in the YearPriceAnnualised ReturnsTotal Returns
201414th Jan$914.51+67.54%+3,727.19%
201515th Dec$462.96+132.63%+7,460.05%
201628th Dec$967.36+140.72%+3,518.09%
201717th Dec$19,041.63+20.70%+83.81%
20185th Jan$16,753.24+27.19%+108.91%
201926th June$12,733.71+207.21%+93.42%
202031st Dec$28,996.28>+1,000%+20.71%

Our calculations above assumes $35,000 as the price of Bitcoin, with an end-date of 28th January 2021. Through the chart, we will find that Bitcoin has delivered wildly varying returns over the years but will have consistently delivered positive returns even if you buy at the highest price every single year.

On correct management however, proper risk management of a portfolio would see investors not including more than 2.5% – 5% of their portfolio to volatile assets such as Bitcoin. Although it now presents a lucrative picture when we look at Bitcoin’s returns over the years, the prudent investor will recognise that past performance does not guarantee future results

#3 Cryptocurrencies may be an effective portfolio diversifier

An effective portfolio should have assets that have low-to-no correlation with each other. What then, is the correlation of cryptocurrencies such as Bitcoin, with traditional financial assets such as gold or equities?

Looking short-term, recent crises that result in liquidity shocks such the US market rout in March 2020, has seen the relatively high correlation between cryptocurrencies and traditional investments. During that period, we saw Bitcoin suffer heavy declines during the same period as the rest of the market. Bitcoin also seemed to rise and fall in response to US government stimulus measures in late-2020, suggesting higher correlation than previously thought, at least for now.

When we look longer-term however, studies have shown that cryptocurrencies have near-zero to negative correlations to many traditional financial assets such as gold, the S&P500, US Treasuries, and crude oil. A recent study released by Fidelity in October 2020 after the negative pandemic shock still showed that the correlation of Bitcoin with traditional assets seems to be 0.11 (as opposed to 1.0 – a perfect correlation where the price of both assets move together). As such, a perfectly plausible case may be made for adding cryptocurrencies to long-term, well-diversified portfolios for investors looking to hedge against a variety of scenarios.

An Exchange Traded Fund (ETF) is a marketable security that is formed to track nearly anything, ranging from a specific index, sector, commodity, or increasingly, theme. They are most commonly used to track a basket of stocks, and can typically be accessed through the same channels as regular stocks. ETFs are typically separated into passively-managed ETFs that simply mirror the security they are tracking (e.g. the STI), and actively managed ones that attempt to deliver higher returns or specific investment objectives, often with a pre-specified theme in mind (e.g. ARK Invest’s Innovation ETF).

Why should I trade in ETF CFDs?

  • ETFs have been growing in popularity over the years. 2020 was the best year for ETFs yet, with global equity ETFs seeing more than $1T in inflows within a 12-month period. Using CFDs to gain exposure to ETFs allows for greater capital efficiency because only a portion of the contract value is required as margin to establish a position.
  • ETFs are particularly popular with investors seeking a relatively hassle-free investing experience, while desiring exposure to a range of specific and relatively understandable securities. Trading ETF CFDs brings greater convenience by eliminating the need for traders to hold multiple currencies in order to access global ETFs.
  • An investor wanting exposure to the post-pandemic economic recovery could open a position in the well-known SPDR S&P 500 ETF (SPY), which tracks the performance of the S&P 500. Another investor that may be convinced of the future importance of Environmental, Social and Governance concerns (ESG) may find the increasing selection of ESG-themed ETFs that track a basket of high ESG-rating companies to be a good investment, rather than cherry-picking individual equities by hand. ETF CFDs can act as a powerful tool for traders can profit from both directions of the market by taking on long or short positions.

A look at two ETF CFDs we offer:

1) Has the ARKK been sunk?

ARK Innovation ETF (ARKK) ARKK is an actively managed ETF by ARK Invest that invests in a range of companies based on their innovative and industry-disrupting potential. ARKK’s largest holdings are in companies such as Tesla, Square, and Zoom. ARKK is down around -33% from peaking on 12th Feb and is currently in the red for the year to date as the market experiences a risk-off outflow of funds. Superstar fund manager Cathie Wood has however been consistently doubling down on her bets, buying even more shares in growth stocks that are going through their own tumultuous periods such as DraftKings, Peloton, Teladoc, and Tesla. In her view, ARKK is playing the long game, and remains steadfastly convinced in the long-term prospects of these growth stocks beyond this current bout of volatility. Similarly on outflows, investors are still betting big on ARKK as ARK Invest has only lost about $1.2B in assets this year across all its six funds, compared to seeing an inflow of $15.1B during the same period. Recently, investors have been nervously eyeing ARKK’s basket of tech stocks as their future earnings potential remain vulnerable to erosion through high inflation – the dominant concern of the market in recent weeks. As commodities – the major contributor to the recent heightened inflation fears – drops sharply from record highs, are investor concerns over hyperinflation overblown?

2) Searching for exposure to Asian equities?

iShares MSCI Asia ex Japan ETF (AAXJ) The AAXJ is currently trading -10.6% adrift of all-time highs seen in February, giving up gains in tandem with an Asia-wide equity sell-off at the time. Given that slightly over 40% of the ETF’s holdings are based in China, the ongoing tumult seen in Chinese equities currently have carried over nearly perfectly in the AAXJ, as Chinese investors take a breather after the stellar gains made over the past year. Looking ahead, Asia – and particularly China, is steaming ahead with its economic recovery. China is widely expected to be one of the best-performing major economies this year, providing a major boost to the outlook for corporate earnings. As the rest of Asia and the world gradually opens up their own economies, AAXJ is likely to again benefit from strong Asian outperformance amidst a strengthening trade outlook.

CFD is available for trading on Phillip MetaTrader 5 (MT5).

Features of trading CFD:

  • Trade in both the bull and the bear markets
    The ability to enter a long and/or short position allow traders to take advantage of both rising and falling markets.
  • Smaller barrier to entry
    Flexible and smaller contract sizes. This means that traders will be able to enter into a contract with a modest amount of capital.
  • No expiration date or risk of delivery
    Unlike futures which commonly have a fixed expiration date, CFD allows traders to perpetually hold the position(s). CFD is cash settled, no need to worry about the delivery of the underlying asset.


Benefits of using Phillip MT5:

Trade at zero commission on a dynamic platform that offers low spreads. Integrated with Autochartist and Trading Central Indicators, and available on mobile, web and desktop app, you will never miss a trading opportunity with Phillip MT5.

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