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Crypto for Advisors: Is Crypto Too Volatile?

A. With respect to correlation, a volatile asset like crypto is actually very important to decrease the overall volatility of a portfolio. Lowering the overall volatility of a portfolio is important as it helps smooth investment returns over time. This is important for many reasons. For example, an investor could have significant and unpredictable liquidity needs. If they have a portfolio of highly correlated assets and those assets are experiencing a period of poor returns, they would be withdrawing a larger percentage of their portfolio compared to a portfolio that included less correlated assets. Crypto, having a low correlation with traditional assets, could help in this regard. Its volatility has historically been positively skewed so even though it has big swings, when all other assets are down it can provide a ballast to your portfolio. Smoothing returns also helps from a cognitive perspective for most investors. People can get too emotional when looking at their portfolio’s performance. Big price moves have a visceral effect where large moves up make people want to buy more (usually right before a drop) and large moves down make people discouraged and pull money out (right before performance rebounds). Including at least a small portion of (less-correlated) crypto in a portfolio smooths the returns of a portfolio so when investors check in, they see more modest gains or losses. This helps keep their portfolio out of sight and out of mind which generally improves the chances of long-term success. Crypto, while volatile, should not be viewed in isolation but in the context of how it can help create a truly diversified portfolio that will help create long-term wealth for investors.

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