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Should you add digital assets to your investment portfolio? With scenarios

By Amber Group 07/11/2023, 6 min read time

 

More than one-third of traditional hedge funds have started allocating capital to digital asset investments. This is what the 4th Annual Global Crypto Hedge Fund Report 2022 published by PwC found out, adding that the number nearly doubled compared to the previous year.

 

Not only hedge funds, but also other kinds of corporations, sovereign wealth funds, and even pension funds have begun allocating some of their capital to digital assets.

 

Why? And how?

 

Portfolio diversification, also called asset allocation, is a crucial investment strategy that could be summed up as “don’t put all of your eggs in one basket”. In other words, it refers to investing in different kinds of assets, may they be traditional ones, e.g., securities, stocks, or ETFs, or digital ones, e.g., Bitcoin, Ethereum, crypto ETFs, and so on. 

 

Digital assets have established themselves as important segments of the portfolio of any investor looking to rev up returns and provide other advantages. Research shows that adding digital assets to your portfolio can help you mitigate risk, improve your returns (especially in the long run), and better navigate volatile markets.

 

 

What could happen if you added digital assets to your portfolio?

 

When it comes to the proportion between digital and traditional investment assets in your portfolio, there is no univocal answer. Some tokens and coins entail higher risks than others and require a great degree of understanding of how digital assets work. Some other assets such as Bitcoin or Ethereum share a higher portion of the market and are well-established projects, which tend to be seen as a safer investment. This does not mean that they are not subject to market trends and price swings. It is always recommended to Do Your Own Research (DYOR), clarify your financial targets, the investment period, and how much you are willing and able to risk. Great opportunities may entail great risks, too.

 

There are some guidelines that can help you choose how much to invest in digital assets. 

 

The 5% rule

 

Fidelity’s report “Getting Off Zero: Bitcoin’s Role in Modern Investment Portfolios” explores the impact that investing in Bitcoin would have on an investor’s portfolio, stating that “small allocations have been historically meaningful and have the potential to continue to drive worthwhile, positive portfolio outcomes.”

 

When it comes to how much, some follow the 5% rule of thumb, i.e., dedicating 5% of the investment capital to digital assets. While some may regard this as a rather conservative strategy, it may well suit more risk-averse and traditional investors that are just getting started in the digital financial world. 

 

 

The “More than 5%”  rule

 

Sharp market swings may also mean greater investment opportunities. For more risk-friendly investors, allocating more than 5% to digital assets is the preferred strategy. The higher amount of digital assets, the higher the potential for returns. But also, the higher the risk and the potential losses. 

 


 

We have designed two portfolio scenarios to help you visualize the investment opportunity of allocating digital assets to your portfolio. Please note that the scenarios cover a time period of 3 years, i.e., a long-term investment tenor that may go through many ups, but also some downward market trends.  

 

 

  1. Conservative approach: If you had allocated 5% of your portfolio to Bitcoin between 1 June 2020 and 1 June 2023

 

As the most popular digital asset, Bitcoin is also the highest-priced asset despite volatility and market drawdowns. 

 

How much would investors have earned by investing 5% in BTC between 1 June 2020 and 1 June 2023?



Representation of a 1M USD diversified portfolio with and without Bitcoin, based on the average and/or historical return rate of each asset:

 

 

Past performance is not indicative of future performance. The average annual return of the assets indicated was found at the following links: Bitcoin; Checking accounts; 3% average of Fixed Deposit products; Stock SP500; Real Estate.




  1. Aggressive approach: If you had allocated 20% of your portfolio to Bitcoin  between 1 June 2020 and 1 June 2023

 

How much would investors have earned by investing 20% in BTC between 1 June 2020 and 1 June 2023?

 

Representation of a 1M USD diversified portfolio with and without Bitcoin, based on the average and/or historical return rate of each asset:

 

 

Past performance is not indicative of future performance. The average annual return of the assets indicated was found at the following links: Bitcoin; Checking accounts; 3% average of Fixed Deposit products; Stock SP500; Real Estate.

 

 

Five tips to help you diversify your portfolio
 

  1. Have you ever invested in digital assets?

Depending on your understanding and knowledge of digital asset projects, you may want to “play safe” and go for stablecoins and/or major coins such as Bitcoin and Ethereum, or invest in emerging, promising assets that require research and digital asset expertise. 

 

  1. How much are you willing to earn – and risk?

Steeper returns entail higher risk. Before investing, you should carefully consider how much you can lose in case the market’s worst-case scenario becomes true. 

 

  1. Define your financial goals

How long are you looking to invest? Three months, five years, or ten years? Are you looking for flexible withdrawal terms, or are you willing to lock up your assets for a fixed period? Before investing, you should carefully your financial situation and your financial goals

 

  1. Do your research

There are over 22,000 digital assets in circulation. Which ones should you invest in? Before taking any decision, you should carefully consider several questions, among others:

  • When and how was the project started?

  • Is it a meme coin or a tech project with applicability? 

  • What investors are behind the project?

 

  1. Have you considered working with experts?

When things get complex, or risky, it is important to trust experts. Working with digital asset wealth management specialists can help you choose the right strategy according to your investment preferences.

 


How we do it at Amber


For our clients and our investments, we tend to prefer broadly diversified portfolio options that trade on multiple markets. Our mixed approach combines diverse strategies to provide strong risk-adjusted returns that are uncorrelated to traditional asset classes, including trend-following strategies taking positions that follow the direction of market trends, as well as reverse strategies taking contrarian positions in markets that are losing momentum or reversing. 

Our digital asset wealth management product suite includes a wide range of solutions for all kinds of investors, including:

  • Fixed / flexible investment products 

  • Structured products 

  • Collateralized Lending

  • Concierge services for VIP clients

  • OTC and Execution

 

For more information on our digital asset wealth management options, you can contact us at [email protected].

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