When constructing an investment portfolio, diversification is essential to mitigate against investment risk caused by the natural price fluctuations seen in financial markets. In an effort to offset some of that inherent volatility, many investors naturally seek to hedge their traditional portfolio positions with alternative assets. The approach of adding to the portfolio mix from a range of alternative assets that are weakly correlated with traditional financial assets is what introduces the “diversification effect” to an investment portfolio, which reduces its overall risk.
Depending on an investor’s liquidity requirements, investment horizon and risk tolerance, one may typically allocate a portion of their invested capital to real estate, art, private equity and hedge funds, structured products, and precious metals, principally, gold. Realistically, most of these alternative asset classes are typically only accessible to or suitable for institutional investors. Because of that and because real estate and to a lesser extent, gold, offer greater accessibility, they tend to be the main drivers of diversification in mainstream investment portfolios.
Such was the case until the recent emergence of crypto assets, with the launch of Bitcoin in 2009 in response to the economic turmoil caused by the Great Recession. Mainstream retail investors were the first to see Bitcoin as a hedge, not only to their traditional investment portfolios, but also as a hedge against exogenous jolts to the overall global economy. Fintech platforms and exchanges supporting the unbanked and underbanked, tech-savvy early adopters, speculative investors, as well as the hardcore libertarians, were some of the early proponents who propelled the network to its current market position as a real and entirely new investible asset class, well before the likes of Wall Street took it seriously.
Over the course of its fledgling existence, Bitcoin has managed to concretely assimilate itself into global financial markets at an unprecedented pace for a new financial asset. The original cryptocurrency initially emerged in 2009 as “internet money”, freely sloshing around the World Wide Web in an open and permission-less peer-to-peer electronic cash system. Bitcoin now ranks handsomely among the ten largest world currencies, having gained entrenched adoption over a relatively short period of time, with over 1.1 million active wallet addresses conducting daily transactions. With the daily volume exceeding $10 billion, Bitcoin’s liquid market cap is approaching $600 billion, according to live market data from Messari.io as of January 24, 2021.
This strong momentum has continued to build unprecedented momentum much to the chagrin of many archaic central banks and stagnant financial institutions, with little exception (eg. Central Bank of The Bahamas with its Sand Dollar national digital currency), even as some of their rudimentary tactics lose efficacy, and bullishness on Bitcoin proliferates throughout global financial markets.
As we enter the first global recession since its inception, the environment for which it was originally designed to thrive, Bitcoin has securely nestled its way