Matrixport View_Market #1

Matrixport Research


  • From the perspective of asset allocation, allocating a proportion of assets to BTC and ETH helps to construct a lower risk and effective portfolio. This report is based on returns performance analysis of major asset classes from 2016 till date. Based on modern portfolio theory, we attempt to include BTC and ETH assets to the portfolio in our analysis, returning excellent ex-post returns. Generally speaking, investors with lower risk tolerance can allocate a smaller portion of their assets to cryptocurrency, and vice versa.

  • From the perspective of safe-haven, performance of BTC in most of the risk events is abysmal, with strong performance in political-related incidents only. Comparatively, amongst traditional safe haven assets (gold, USD, Swiss Franc), USD performs well in the various risk events, making it the undisputed safe-haven asset. With the exception of geopolitical events and US elections, performance of gold is respectable for the other risk events. Performance of Swiss Franc is weak for most of the risk events.

Is BTC a good choice for asset allocation?

Recently, Paul Tudor Jones (a famous wall-street fund manager) confirmed that he has allocated over 1% of his assets in Bitcoin. The key question remains, is BTC a good choice for asset allocation? If yes, what is the approriate percentage allocation to BTC?

Since 2016 till date, BTC and ETH’s market performances have outshined other asset classes, with BTC increasing c.20x fold and ETH increasing c.200x. These return profiles have been the best in the market, with the next closest being gold, at 71% return. Compared to other asset classes, BTC and ETH have exhbited much higher volatility, indicating the underlying risks are much higher. Therefore, it is impossible to judge BTC suitability for asset allocation based on the historical return and volatility profile.

According to Modern Portfolio Theory (MPT), rational investors will construct their portfolio of assets based on two methods; (1) to maximize returns for a given level of risk, or (2) given a desired level of expected return, construct a portfolio with the lowest possible risk.

Sharpe ratio is derived by subtracting the risk-free rate from the mean return of the constructed portfolio and divide the result by the standard deviation of the portfolio’s excess return. Sharpe ratio can be used to understand the return of an investment compared to its risks. A higher Sharpe ratio indicates a higher risk profile of the portfolio. Generally, the greater the value of the Sharpe ratio, the more attractive the risk-adjusted return.

Going all in on a single asset class is typically not a sound investment choice. By diversifying one’s portfolio through adding various asset classes, investors can decrease their portfolio risk without sacrificing returns, and increase the Sharpe ratio. Conceptually, diversification includes investing in different asset classes with low correlation, resulting lower standard deviation of the portfolio. Generally, the weaker the positive correlation between the different asset classes (stronger negative correlation), the greater the reduction of portfolio risk, thus increasing the Sharpe ratio for the same level of return, building a more effective portfolio.

Correlation is measured by correlation coefficient, with the coefficient ranging from +1 to -1. +1 coefficient represents perfect correlation, meaning the assets will move lockstep in the same direction. -1 coefficient represents perfect negative correlation; the two assets will move in opposite direction in the same magnitude. Based on the correlation matrix, BTC and ETH have weak correlation with other major asset classes (Data based on start of 2016 to present).

Recently, although the positive correlation between BTC and other major assets has increased, the overall correlation is still weak.

From the perspective of asset allocation, it is a good choice to allocate a portion of assets to BTC and ETH, as it reduces the overall portfolio risk while increasing its Sharpe ratio. Investors will be able to build a more effective portfolio.

Efficient frontier is the core concept of the MPT, and the foundation of the asset allocation model. The efficient frontier is the set of optimal portfolios that offer the highest expected return for a defined level of risk or the lowest risk for a given level of expected return. Portfolios that lies to the left of the frontier is impossible to construct while portfolios that lies to the right are inefficient as they offer lower returns for the same risk compared to portfolios that lies on the effective frontier.

Picture 4 is the efficient frontier constructed using BTC, ETH, Gold, Oil, Shanghai Stock Index, US S&P 500 Index, China S&P Bond Index. The green part represents the efficient frontier while the blue part represents the invalid component. At the same level of risk, the return of the green part is higher than the blue part.

Table 3 contains the details of the different asset combination on the efficient frontier. Based on the results, we can verify our thesis above. By allocating a certain proportion of assets to BTC and ETH in the portfolio construction, we are able to construct a more effective portfolio – Similar return profile, lower standard deviation (risk) than a single asset, with a higher Sharpe ratio. For example, BTC return is 105% while its standard deviation is 0.8 and Sharpe ratio is 1.3. Comparatively, a diversified portfolio of similar returns of 104% has a standard deviation of 0.59 and Sharpe ratio 1.7.

For investors with different risk appeitite, the ratio of asset allocation to cryptocurrency will differ. Generally, for a more risk averse investor, the corresponding portfolio should have a lower allocation to cryptocurrency, and vice versa. For example, an investor with risk averse constraints can allocate 0.61% to BTC and 0.27% to ETH and achieve an annualized return of 5.21%. On the other hand, an investor with bigger risk appetite can invest 4.43% in BTC and 3.09% in ETH, achieving annualized returns of 15.64% (higher risk profile).

Is BTC a good safe-haven asset?

As illustrated above, many investors have traditionally viewed BTC as a safe-haven asset due to its weak correlation with major asset classes. However, due to the high volatility and lock-stepped drop experienced by BTC along with other major assets on 12 March, many investors are starting to doubt the safe-haven claim. Therefore, is BTC really a good safe-haven asset to own? Or more specifically, is BTC a good safe-haven asset for some riskier situations?

Based on Investopedia’s definition, safe-haven asset is an investment that is expected to retain or increase in value during times of market turbulence. Gold, US Treasuries, main trading currencies (USD, JPY, Swiss Francs etc) are considered safe-haven assets.

Market turbulences are typically marked by risk events. In our report, we explore risk events that occurred in the general market, and split them to 3 main categories: Economic crisis, geopolitical incidents, other sudden incidents. We selected the key incidents as the starting point, and looked at the following 1-month performance of the various safe-haven assets (Please note that such an analysis can exclude the impact of other incidents on different asset prices, and could alter the results of the analysis).

Since the start of 2014 till date, there has been 2 economic-related crises, the 2019 emerging economies’ currency crisis and the 2020 liquidity crisis. In the one month aftermath, the performances of both USD and gold were good, exhibiting good safe-haven characteristics. BTC and Swiss Franc, on the other hand, had lacklustre performance, exhibiting weak safe-haven characteristics.

Within the same time period, there has also been 2 geopolitical incidents, the annexation of crimea by russia in 2014 and US-Iran conflict in 2020. In the events of the geopolitical crisis, US dollar index performed well while BTC, gold and Swiss Franc were abysmal.

For political events such as Brexit and US election, market performance of BTC has been good. However, the performance weakens for incidents such as US-China trade war and Covid-19. The US dollar index displayed strong performance for the various incidents, while gold had a strong run in all incidents with the exception of US election. Market performance of Swiss Franc was acceptable for the Covid-19 incident.

In summary, the performance of BTC in major risk events has been abysmal, only in political—related incidents does it perform well. Performance of gold is lackluster for geopolitical events and US election, while market performance for other risk incidents is decent. For the various risk events, USD performs well while performance of Swiss Franc remains poor.


Matrixport provides this analysis as general information only. Matrixport accepts no responsibility for the accuracy or completeness of any information herein contained and Matrixport shall not be responsible for any loss arising from any investment based on any forecast or other information herein contained. The contents of this materials should not be construed as an express or implied promise, guarantee or implication by Matrixport that the forecast information will eventuate. The cryptocurrency market is highly volatile. Buying, selling, holding, or investing in cryptocurrencies or related product carries various risks and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before participating in the cryptocurrency market. Matrixport is not acting as a financial adviser, consultant or fiduciary to you with respect to any information provided. Any information available here is “general” in nature and for informational purposes only.