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Investors can use crypto to diversify their portfolios but should be limited to 1%, says JPMorgan

JP Morgan has cautiously recommended that investors should consider adding crypto to their portfolios for diversification.

Image by : Can Pac Swire / Flickr

Fri, 26 Feb 2021, 12:47 pm UTC

It appears that Wall Street is slowly warming up to the idea of investing in cryptocurrencies. JP Morgan has cautiously recommended that investors should consider adding crypto to their portfolios for diversification.

A number of publicly traded firms have already started adding Bitcoin as part of their treasuries as a hedge against inflation. For instance, Microstrategy and Square recently made headlines for buying more BTC to add to their already sizable holdings.

But JPMorgan’s recommendation to investors is more reserved compared to Microstrategy and Square’s crypto strategy. Instead of betting big, the investment firm advises investors to allocate only a small portion of the portfolios for cryptos to help them manage risks associated with price volatility.

“In a multi-asset portfolio, investors can likely add up to 1% of their allocation to cryptocurrencies in order to achieve any efficiency gain in the overall risk-adjusted returns of the portfolio,” JPMorgan’s strategists including Joyce Chang and Amy Ho wrote in a note on Wednesday, according to Fortune.

Bitcoin, the world’s largest cryptocurrency by market cap and the crypto asset of choice among institutional investors, is known for its massive price fluctuations. This year alone, the crypto has jumped from just $29,333 to a new all-time high above $58,000, before crashing once more below $50,000. At the time of writing, BTC is trading at $46,702 based on data from Coinmarketcap.

Although volatile, many believe that cryptocurrencies may be able to provide a good hedge since they are uncorrelated with other assets. Calculations done by former Federal Reserve economists Roberto Perli and Benson Durham at Cornerstone Macro LLC suggest that the addition of some amount of cryptocurrencies could reduce the volatility of equity portfolios, according to Bloomberg.

However, JPMorgan warned that there is a limit to the usefulness of cryptos as a hedge. “Cryptocurrencies are investment vehicles and not funding currencies,” the investment firm’s strategists wrote. “So when looking to hedge a macro event with a currency, we recommend a hedge through funding currencies like the yen or U.S. dollar instead.”

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