Crypto offers accessibility and liquidity rarely seen in traditional alternatives. Investors can buy, sell, and hold crypto assets with minimal friction, often around the clock. Writes Apollo Sande, Country Manager for Luno Kenya.
Wealthy investors are increasingly looking beyond traditional assets to diversify their portfolios. Among the expanding universe of alternative investments, cryptocurrency stands out for offering advantages that few others can match.
Alternative investments typically attract those seeking higher returns and lower overall portfolio volatility. The category spans real estate, private equity, hedge funds, commodities, and collectibles like art or wine- assets that tend to move independently of traditional markets, thus providing valuable diversification benefits.
However, many of these alternatives come with notable drawbacks. They often require large minimum capital commitments, lengthy lock-up periods, and suffer from limited liquidity. Private equity funds, for instance, can tie up capital for 7-10 years. Real estate transactions can take months to complete. Art pieces may languish in galleries or storage for years before finding the right buyer at the right price.
By contrast, crypto offers accessibility and liquidity rarely seen in traditional alternatives. Investors can buy, sell, and hold crypto assets with minimal friction, often around the clock. Platforms like Luno, which prioritise compliance and responsible investing, have made it possible for individuals to gain exposure to this emerging asset class through secure and transparent channels, bringing what was once a niche market to a far broader audience.
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Crypto's Unique Position
Crypto asset manager Grayscale’s Crypto in Diversified Portfolios report describes cryptocurrency as a high-volatility alternative asset class that can enhance risk-adjusted returns when integrated into traditional portfolios.
The crypto market is undeniably more volatile than most traditional assets, but that risk has often been offset by higher historical returns, especially in assets like Bitcoin. Grayscale’s research suggests that allocating about 5% of a diversified portfolio to crypto strikes a meaningful balance between risk and reward- enough to capture potential upside during bull markets while keeping overall portfolio volatility in check.
Why 5%? Because it’s sufficient to benefit from crypto’s growth cycles, yet small enough to limit exposure during market turbulence.
The Liquidity Advantage
Unlike most alternative assets, the crypto market operates 24/7, offering investors unmatched liquidity and flexibility. It also enables investors to preserve their limited offshore investment allowances.
While Bitcoin remains the flagship cryptocurrency, the broader digital asset ecosystem has evolved significantly. Ethereum has emerged as a leading network for decentralised finance, while numerous altcoins offer higher risk-reward profiles and innovation in niche areas.
Managing Expectations
New investors should temper expectations. Bitcoin has experienced four major drawdowns in its history, averaging a 77% peak-to-trough decline. Smaller dips of 10-20% are common, even during appreciation phases. Crypto is not a defensive asset; it's positively correlated with equities and tends to fall when risk aversion rises.
Given this volatility, a disciplined, research-based approach is essential. Studies indicate that a 5% allocation remains the optimal range for capturing upside potential while containing downside risk within a diversified portfolio.
Visit Luno to explore more investment opportunities.
*This information should not be construed as financial advice or as a solicitation to trade. All opinions and information provided are for informational purposes only.
