- The Economist says it’s wise to include bitcoin in an investment portfolio
- “It is a Nobel prize-winning diversification strategy,” the magazine says
It’s Wise to Hold Bitcoin According to the Modern Portfolio Theory
One of the oldest and most respected magazines in history, the Economist, explained why it’s wise to own Bitcoin if you were an investor. The magazine wanted to increase your probability of having high returns.
Owning Bitcoin, according to an article published on The Economist, would be a “Nobel prize-winning diversification strategy”. The article examines the work of Harry Markowitz, an economist, and his findings about the “modern portfolio theory”. This theory has a balanced approach to an optimal choice of financial products.
“Diversification is both observed and sensible; a rule of behavior which does not imply the superiority of diversification must be rejected both as a hypothesis and as a maxim,” writes Mr. Markowitz in his paper published in the Journal of Finance in 1952.
The theory of Harry Markowitz suggests the goal of the investor is to enjoy maximum returns relative to the risk they are taking. On that note, Mr. Markowitz shows that high returns can be achieved by using a strategy based on diversification.
The Theory of Markowitz Assumes Holding Non-Correlated Assets
Moreover, he argues, this strategy would reduce volatility because a diversified portfolio would comprise of non-correlated assets, or financial products not connected to each other. For example, an investor who has in their portfolio two assets that have nothing in common would know that if one of the assets tumbled, the other would have preserved its value.
The Economist goes on to discuss the theory proposed by Harry Markowitz. The magazine describes that the work of Mr. Markowitz points that “it was not necessarily an asset’s own riskiness that is important to an investor, so much as the contribution it makes to the volatility of the overall portfolio—and that is primarily a question of the correlation between all of the assets within it.”
Bitcoin as a Provider of Diversification
That’s where Bitcoin steps in and provides this needed element of diversification. In contrast, Bitcoin is different than all traditional financial assets such as stocks, bonds, commodities, and currencies. In many ways, including a hedge against inflation, buying Bitcoin could be the best choice an investor could make.
“The cryptocurrency might be highly volatile, but during its short life it also has had high average returns. Importantly, it also tends to move independently of other assets,” the article on The Economist says.
Harry Markowitz went on to win the 1990 Alfred Nobel Memorial Prize in Economic Sciences with his work on the investment portfolio.