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The New Diversified Portfolio: How to Apply MPT to the Digital Market

Chances are, you’re no stranger to modern portfolio theory (MPT). By definition, it’s the practical method for selecting investments in order to maximize their overall returns within an acceptable level of risk. The core practice of MPT is diversification because, well, if you put all your money in just one investment and that investment doesn’t do well, you could lose a lot of money. But if you spread your money across different assets, even if one investment doesn’t do well, the others may still perform better and help balance out your overall returns. We’re not telling you anything you don’t know, but here’s the question: Where do digital assets factor into this? 

Digital assets as a diversification tool

Blockchain added an interesting ripple to the concept of diversification in that it allows investors to diversify into a different market outside of traditional financial instruments. Cryptocurrencies have a historically low correlation with traditional assets like stocks, bonds, and commodities. This means that their price movements often behave independently from traditional investments. Although the S&P 500 and the Bitcoin network currently find themselves trading in step, their inherent differences create the potential for them to separate (and we’re beginning to see this occur). 

Tokenization also allows investors to diversify into otherwise inaccessible alternatives. For example, private equity (PE) was originally only available to institutional investors or the extremely wealthy few. Through tokenization, which increases democratization (making things accessible to everyone), minimum investment thresholds for PE investments can be lowered, and more investors can take advantage of these proven vehicles to balance their portfolios.

Responsible diversification (now includes crypto)

Because of this, cryptocurrencies are now suggested as a crucial part of any investor portfolio. In 2019, a Yale report cited the optimal allocation of crypto to a portfolio as being 4% to 6%. Now, after some market maturation through growing pains and mass adoption, recommended allocations for the average investor portfolio fall from 1% to 5%. As a tool for diversification, digital assets stand unmatched.

However, in keeping with MPT, most investors tend to be more risk-averse in their investments, and cryptocurrencies are inherently more volatile than traditional assets. This volatility can easily be traced back to fewer stop-gaps in the digital asset market—you can trade 24/7, there are no limits, and it’s fully autonomous. But volatility is volatility, and this asset class is still fairly new, so how can you invest on behalf of clients while still maintaining comfort levels? And, as it represents a smaller allocation within a more diverse portfolio, how can you ensure you’re not spending an outsized portion of your time researching, recommending, and acquiring these assets for your clients? That’s what crypto models are for.

The new diversified portfolio through models

The same benefits that model investing can have for a traditional portfolio can be applied to the digital asset market. Models enable you to invest a designated sum of capital across a wide range of assets while delegating the granular research and rebalancing to leading, trusted institutions. You need access to digital asset investment tools that are time-efficient without sacrificing the due diligence needed to make thoughtful allocations. That’s why we created Onramp. 

Accessing new diverse portfolio tools for your clients

Ignore the myth that digital assets have nothing to do with what you already know. The great thing about having experience in the traditional market is that much of the knowledge you’ve built applies to digital assets—MPT, risk tolerance, conservative allocations, and more. You have the smarts, and now, through Onramp, you have the tools. 

Our marketplace lets you leverage cryptocurrency models from expert asset managers like WisdomTree, Valkyrie, Global X, and more, with guidance through fact sheets and automatic rebalancing. We also give you access to index providers like CoinDesk Indices and tokenized assets through our partner Securitize. Most importantly, you can access (and exit) these models in real time, make trades in minutes, and integrate the tools into your existing tech stack, making everything fast and easy. 

The new market requires new tools and trusted insights, both of which you can access through Onramp. Get started.

Disclaimer:  This is not investment advice. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. All Content is information of a general nature and does not address the circumstances of any particular individual or entity. Opinions expressed do not express the views or opinions of Blockforce Capital or Onramp Invest.