Just Diversify? With Crypto Portfolios, It's Not So Simple

The Nobel Prize-winning economist, author of the classic 1952 article "Portfolio Selection," devised modern portfolio theory, which stresses that diversifying assets is crucial.

Time and time again, Markowitz's research has shown that investors can assemble the perfect portfolio.

Recently published research by the Bocconi Students Investment Club at Bocconi University in Milan, Italy, showed that applying the MPT framework to crypto beat all other portfolios, at the cost of a greater volatility.

"Our findings, consistently with MPT, are that portfolio variance can be significantly lowered by exploiting low covariances between coins."

In this way, it's a validation of the idea that 50 to 60 percent of a crypto portfolio should be core holdings of the two largest coins by market capitalization, bitcoin and ether.

Jeffrey Van de Leemput, a co-founder of Cryptocampus, a crypto mentoring group, says diversifying your portfolio is very important.

Not only will this mitigate risk but it can also substantially increase the reward factor of a portfolio.

JP Morgan strategist John Normand examined the potential role of cryptocurrencies in diversifying a global portfolio in a 71-page research report on cryptocurrencies published in February.

"Given both their high returns over the past several years and their low correlation with the major asset classes, offsetting some of the cost of high volatility. If past returns, volatilities and correlations persist, CCs could potentially have a role in diversifying one's global bond and equity portfolio."

It is a well-known investment strategy which guides investors to combine a portfolio of assets with returns that are not always positively correlated in order to lower portfolio risk without sacrificing return.