Even Wild Crypto Can Temper Volatile Stocks, Cornerstone Says

(Bloomberg) -- In the latest twist to a roller-coaster year for traders, investors looking to counter the wild volatility of the stock market can now consider the stabilizing influence of cryptocurrencies, according to Cornerstone Macro LLC.

Strategists including Roberto Perli and Benson Durham used estimates of volatilities and correlations among the S&P 500 and five digital coins, including Bitcoin and Ether, to work out the optimal amount to reduce volatility in portfolios. They found a share of crypto that ranged between 0% and 64% in data back to September 2015, with the average at 6.4%, would help produce such a minimum variance portfolio.

“Even though cryptos remain more volatile than stocks, the so-called minimum variance portfolio -- comprised of the S&P 500 and a handful of digital coins -- can nonetheless reduce risk meaningfully relative to equities alone, including during the worst of 2020,” they said.

Cryptocurrencies have been on a tear this year amid increased institutional acceptance, interest from family offices and younger investors, as well as concerns about Covid-19’s effect on the global economy and on fiat currencies due to the stimulus flooding the system. However, it’s still seen as a volatile asset class, and concerns about issues like legitimacy and security remain.

One key reason why a basket of the largest cryptocurrencies can help reduce overall volatility risk is the significant variance in price moves between the coins themselves, making them good diversifiers, the strategists said.

“Despite high volatility among cryptos, the evidence points to potential diversification benefits for a wide array of investment mandates, even during a year as tricky as 2020,” the economists said.

©2020 Bloomberg L.P.