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As an asset that exists purely in digital form, cryptocurrency is fundamentally different from other major asset classes.
Bitcoin still accounts for most of the investor interest and assets, but numerous digital currencies have also attracted more attention from both retail and institutional investors over the past couple of years.
As a nontraditional asset, cryptocurrency has had an extremely low correlation with most other major asset there are two reasons crypto may not make the best portfolio diversifier.
First, as digital assets have attracted more interest from mainstream investors, correlations have steadily trended up in recent years.
Second, crypto’s potential diversification value has been overshadowed by its extreme performance swings. Instead of acting like a noncorrelated asset, digital assets are mainly defined by their extreme volatility. Over the past three years, bitcoin has been nearly 4 times as volatile as stocks. Much of this volatility has been on the upside, but bitcoin and other cryptocurrencies have also been subject to extreme drawdown risk.
The three examples discussed above underscore two of the limitations of correlation metrics. First, correlations can change over time, meaning that assets that were once great diversifiers may no longer be so. And second, even assets that still have a relatively low correlation coefficient may still be subject to above-average downside risk.
This article was provided to The Associated Press by Morningstar. For more personal finance content, go to
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