Cryptocurrencies and the Sharpe Ratio of Traditional Investment Models

Just over a year ago, Iconic Funds published a report analyzing the impact of cryptocurrencies on the performance of traditional portfolios. Our report concluded that a small, rebalancing allocation to cryptocurrencies has a significant impact on the Sharpe ratio of all the portfolios investigated. We have updated our analysis to determine whether an allocation to cryptocurrencies would have benefitted these same portfolios over the past 12 months.

The past year was special for most investors because most portfolios took a considerable hit, due to the spread of the corona pandemic, lock downs and the resulting economic downturn. This report analyses whether cryptocurrencies could have helped investors weather the crisis a bit better.

The hypothesis underlying this report is that the Sharpe Ratio (Return vs. Volatility) increases for all models by including cryptocurrencies in the asset allocation. To examine the impact cryptocurrencies have on investment portfolios, this report investigates different portfolio structures, with particular focus on the following investment models: a traditional stock/ bond portfolio (with weights of 50/50 and 80/20), a balanced portfolio (stocks/ bonds/ real estate/ gold/ commodities), an endowment model portfolio; a family office/ high net worth individual’s portfolio and a pension fund portfolio.

The report is written by Robert Richter, a research fellow at Frankfurt School Blockchain Center. Research partners include Enigma Securities and BTC-Echo.