5 factors to consider before you allocate crypto in your portfolio
When it comes to achieving optimal growth objectives, it is no secret that diversification of a portfolio across different asset classes is the way to go. Taking into account the adage “not putting all your eggs into one basket”, portfolio diversification mitigates risks brought about by market volatility. At the same time, it broadens and varies your sources of income — reducing reliance on a specific asset class at any particular moment. Then, the question arises: Should you allocate crypto in your portfolio?
Traditionally, the seven major asset classes consist of stocks (equities), bonds (fixed-income), real estate, commodities, forex, gold, and cash. As crypto picks up steam in the financial industry, it is steadily establishing itself as the eighth asset class. From Goldman Sachs launching crypto offerings to Elon Musk being an ardent supporter of Dogecoin, its viability as an asset class is strengthening.
So, if you’re in the midst of building an asset allocation strategy and considering whether to include crypto into your portfolio, here are five factors for consideration.
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1. Significant market capitalization
As of writing, the market capitalization of cryptocurrencies stands at US$2.36 trillion according to CoinMarketCap, having witnessed exponential growth since its inception in 2009. This figure was computed by multiplying the total number of coins in circulation by the price of a single coin at a given moment and provides an estimate of the value of the ‘industry’.
Bitcoin accounts for more than forty percent of the total market capitalization, trading above US$60,000. Ethereum — another key player in the crypto world — recently reached its all-time high, further propelling the market forward. With that, the overall cryptocurrency market is worth more than a handful of powerhouse companies in the world including Apple, Amazon, and Meta (Facebook) individually.
2. Low correlation to traditional asset classes
A market correlation reflects how the prices of multiple assets move in relation to each other. Strategically selecting assets that respond uniquely to various macroeconomic factors is crucial in achieving portfolio diversification. When done correctly, it can minimize volatility and counterbalance with prospects.
“Cryptocurrency should be a part of a diversified portfolio as it is reasonably independent of traditional assets, with various studies conducted to reinforce that,” Alvaro Patron, Head of Sales at Sparrow, commented, when asked about allocating crypto into one’s portfolio.
“Hence, the need to dip one’s toes in this diversified asset class is evident,” he added.
3. Innovative technology at play
At the heart of cryptocurrency, there is an innovative technology known as the blockchain. It is essentially a decentralized, distributed ledger that stores blocks of information (transactional records) which are linked together in a chronological order using cryptography. Managed by a peer-to-peer network, each block consisting of a slew of recent transactions, is securely attached to the end of the growing blockchain using a complex mathematical method and has an exact time-stamp to it.
Thanks to its underlying features, blockchain technology boasts a plethora of benefits. Some of which are:
- Increases trust, security, and transparency
- Ensures immutability — data is unalterable
- Improves efficiency by cutting down on speed
- Boosts traceability and visibility
- Simplifies integration
- Has the capacity to significantly reduce transaction costs
It should come as no surprise that blockchain lays the foundation for cryptocurrency. With that remark, its potential can be utilized far beyond the digital asset sphere. Other emerging applications of this innovation across various industries are anticipated. They include finance, healthcare, and retail — as more sectors realize that it’s usage is paving the way for the future.
4. Singapore’s open approach towards cryptocurrency
Over the past few decades, Singapore has progressively established itself as a global financial hub. Thanks to its transparent and clear regulatory framework along with its efficient and organized markets, the Little Red Dot has emerged as the fourth most competitive financial center in the world — according to the Global Financial Centres Index (GFCI 30).
Singapore aspires to position itself as a key player in the cryptocurrency industry, with the belief that having a head start in the booming sphere will allow the nation to be cognizant of its benefits and risks.
Ravi Menon — managing director of the Monetary Authority of Singapore — said in a Bloomberg article, “Singapore is interested in developing crypto technology, understanding blockchain, smart contracts and preparing ourselves for a Web 3.0 world”.
Currently, the Lion City has crypto-friendly regulations in place, with clear guidelines to prevent money laundering and terrorism financing. This has attracted the largest cryptocurrency companies in the world to set up in the country, while the rest of the world struggles to create the right regulatory environment for this nascent field.
5. Leveraging the crypto options market
Instead of just owning actual cryptocurrency tokens, you can expand your growth objectives by leveraging the crypto options market. This financial derivative allows you to earn a yield on your underlying cryptocurrencies by selling options to earn premiums or take a conservative approach and build your portfolio at desired entry levels while earning a premium.
What makes it so favorable? Whether the market moves up or down, there are various strategies you can use to customize your trading strategy and tailor it to your risk appetite, while simultaneously benefiting from potential upside coming from your premiums earned. Furthermore, unlike owning cryptocurrencies outright, options enable you to benefit from any market condition — even a sideways market — if properly structured.
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Talk to Sparrow to find out how you can allocate crypto in your portfolio
For institutions, family offices, and wealth managers looking to navigate the ever-evolving cryptocurrency sphere and attain their growth objectives, reach out to Sparrow’s digital asset solutions team today! Sparrow will guide you through the process of getting started with allocating crypto assets in your portfolio. No matter your ultimate goals, risk appetite, and time horizon, Sparrow endeavors to customize digital asset products without compromising the technological, legal, and compliance requirements of institutions.
Having mentioned several reasons to consider before you allocate crypto in your portfolio, do bear in mind that there are inherent risks associated with cryptocurrency. As such, take the time to speak to a financial professional to fully understand the risks so that you can make an informed decision. If you would like to learn more about this exciting market, contact us here to speak to a Relationship Manager.
Risk warning on digital payment token services:
The Monetary Authority of Singapore (MAS) requires Sparrow Tech Private Limited (Sparrow) to provide this risk warning to you as a customer of a digital payment token (DPT) service provider. Before you pay Sparrow any money or DPT, you should be aware of the following.
1. Sparrow is exempted by MAS from holding a licence to provide DPT services. Please note that you may not be able to recover all the money or DPTs you paid to Sparrow if Sparrow’s business fails.
2. You should not transact in the DPT if you are not familiar with this DPT. Transacting in DPTs may not be suitable for you if you are not familiar with the technology that the DPT services provide.
3. You should be aware that the value of DPTs may fluctuate greatly. You should buy DPTs only if you are prepared to accept the risk of losing all of the money you put into such tokens.
The information provided here is for informational purposes only and is not to be construed as a recommendation or advice to any prospective investor in relation to any legal, tax, financial investment or any other matters. You should consult with an attorney or other professional advisors to determine what may be best for your individual needs.
Content contained on or made available through any of our communication channels is not intended to and does not constitute legal advice or investment advice and no attorney-client relationship is formed. Your use of the information on any of our communication channels is at your own risk.