Analyst Says Buying Altcoins Increases Portfolio Risk

Willy Woo, a partner of the cryptocurrency hedge fund Adaptive Capital, considers that buying altcoins to diversify a portfolio it only increases its risk. He said that in a Tweet written on September 21, in which he quotes Anthony Pompliano, the co-founder of Morgan Creek Digital. 

Altcoins: Not Good For Portfolio Diversification

Anthony Pompliano, a recognized figure in the cryptocurrency space, wrote a tweet in which he said that the smartest investors understand that it is possible to reduce portfolio risk by adding non-correlated assets. 

For example, this could apply to large investors that want to find a hedge against crises or turbulent periods in the financial markets. Bitcoin could eventually play this role in the future, despite not having many institutional on-ramps as of yet. 

Willy Woo explained that altcoins are highly correlated to Bitcoin and its price against the U.S. dollar. In many cases, when Bitcoin falls, altcoins follow at faster rates. The same happened a few years ago when Bitcoin moved upwards, altcoins followed the trend but even faster. 

During this year, altcoins underperformed Bitcoin, with the exception of some digital assets. While Bitcoin expanded to $13,750, many altcoins continue registering new lows in BTC and USD terms. Some of these cryptocurrencies were among the top 20. 

In 2019, Bitcoin reached the highest market dominance – over 70% – since early 2017, showing the strength Bitcoin had compared to other digital currencies. 

About it, Willy Woo said:

“[…] For the record, alt-coins are highly correlated to BTCUSD. Buying alts in an attempt to diversify only increases portfolio risk. This is why I am not a fan of alt-coin index baskets.”

…and for the record, alt-coins are highly correlated to BTCUSD. Buying alts in an attempt to diversify only increases portfolio risk. This is why I am not a fan of alt-coin index baskets. https://t.co/y6HNIziZAR

— Willy Woo (@woonomic) September 21, 2019

The crypto chartist and investor, Dave the Wave, said that there is a different story if an investor buys altcoins with a smaller position of BTC to leverage the volatility of Bitcoin. In his example, Bitcoin would be used for investment and altcoins for speculation. 

According to data provided by CoinMarketCap, Bitcoin surged almost 330% since it bottomed in December 2018. This allowed the most popular virtual currency to increase 20 percentage points its market dominance from 50% to 70%. 

Since the beginning of the year, altcoins have been losing their relative value in the market. While Bitcoin expanded and grew, these alternative digital currencies that owned almost 50% of the market now own around 30%. Bitcoin can now be traded for around $10,000.