State Street Associates

The Role of Cryptocurrencies

What is the role and diversification potential of cryptocurrencies from a total portfolio perspective?

July 2021

Cryptocurrencies have attracted widespread interest among private investors and even some hedge funds as a vehicle for speculation.

But what’s their role in a portfolio — growth engine or diversifier? We explore the potential role of bitcoin in multi-asset portfolios based on their track record for diversifying stocks (or not) over the last nine years. We consider the various features of diversification: monthly versus multi-year horizons, during up versus down markets, and on average versus specific periods in time. The case has yet to be made for bitcoin as an equity hedge, though it may be heading in that direction. The key for investors is to combine their preferences for risk mitigation and upside potential with bitcoin’s expected diversification and return properties to determine their optimal allocation.

Research and Insights Podcast

David Turkington and Megan Czasonis, two of the co-authors of The Role of Cryptocurrencies in Investor Portfolios, highlight key findings of the paper and discuss what’s next for cryptocurrencies.