General financial entities are beginning to see Bitcoin (BTC) as an unrelated asset, a concept that Morgan Creek Digital co-founder Anthony Pompliano has been promoting for more than a year.
“If Bitcoin is unlikely to correlate with economic factors, or with traditional stocks and fixed-income securities, Bitcoin could serve as a portfolio diversification tool,” said chief economist at the Chicago Mercantile Exchange Bluford Putnam in a February. 11 video on Finbold.
Since Bitcoin is a new type of borderless and decentralized asset, it makes sense that it would not follow the same price fluctuations observed in traditional markets such as stocks and bonds. BTC has provided evidence for this lack of correlation several times in its history, including
Crypto expert Anthony Pompliano, or Pomp, as he is known on social media, has been expressing this concept for years.
“The most important part of Bitcoin, when it comes to global hedging, is the fact that it is an unrelated asset – meaning that as shares rise or fall, Bitcoin has no connection with it,” Pomp told Cointelegraph in an earlier interview.
Over the years, various people have beaten Bitcoin as a viable stable portfolio option due to the asset’s wild price fluctuations. Despite Bitcoin’s volatile price action, Putnam said, however, that the lack of mainstream correlation could make it a valuable, albeit small, addition to portfolios.
“Because Bitcoin is very volatile, only a very small allocation – say 2% of the portfolio – can reduce the risk if the lack of correlation persists,” Putnam said.
Putnam refers to a typical hedge-type portfolio that normally holds 60% equities and 40% fixed-income assets, such as bonds. Historically, this allocation percentage has proved stable in value in most economic situations.
According to experiments in 2019, Putnam said that adding 2% Bitcoin to the mix slightly reduced overall risk. Putnam explained:
“The portfolio for potential diversification also shows how Bitcoin prices could behave if geopolitical events destabilize traditional markets and create uncertainty.”
In August 2019, Pompliano predicted that Bitcoin would eventually find its way into all institutional portfolios.