News - BTC, gold and ETF: Which diversification is most profitable?

By Ted Maas

BTC, gold and ETF: Which diversification is most profitable?

Bitcoin (BTC)

Bitcoin Spot ETF and the Halving: Things are looking good for Bitcoin in 2024. Many people hesitate to go full for Bitcoin. Profit and loss opportunities balance each other out thanks to crypto's extreme volatility. The solution to this according to experts: Diversification.

"Bitcoin typically has little or no correlation with other assets, making it an interesting diversification that can be used to improve a portfolio's overall risk-return ratio", explains Mark Valek, investment specialist at asset manager Incrementum AG.

The numbers say this, too. The Sharpe ratio measures the ratio of the return on an investment above the risk-free rate to the volatility of the return to assess risk-adjusted performance. Generally, a Sharpe ratio greater than 1.0 is considered acceptable to good by investors. A ratio above 2.0 is considered very good. Beyond 3.0, the investment is considered excellent. On the other hand, a ratio below 1.0 is considered suboptimal. During the last bull market, Bitcoin's Sharpe ratio was over 8.5. At the time of writing, this indicator stands at 1.33.

To minimize the risk-return ratio, a Bitcoin portfolio can be combined with traditional investments such as exchange-traded funds (ETFs) and bonds.

For people who want to have a diverse portfolio. The more Bitcoin you have, the more aggressive your portfolio will be. After all, Bitcoin has the highest volatility of any recorded asset. A look at historical trends clearly shows that investors who have more Bitcoin in their portfolio make the most losses during short periods. In a bull market, the situation is just the opposite: the portfolio with the highest share of Bitcoin generates the highest returns.

So there is no such thing as optimal diversification. If you want to make more profit, you usually also run a higher risk of loss. If you prefer to play it safe, you may end up making less profit.

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