What blockchain-currencies mean to porfolio diversification

Cryptocurrencies have no or small correlation to traditional financial instruments and that is a big thing for an investor following principles of modern portfolio theory. Recent paper by Seng, Silva and Saerbeck investigate hedging capacity of cryptocurrencies… and find that they can be useful despite the volatility.

According to modern portfolio theory the only free lunch is diversification: the less there is correlation between instruments in the portfolio the better. Investor seeks for the best risk/return combination. As traditional financial instruments are increasingly interlinked and have limited expected returns at this point of time, investors seek for alternative investment targets. Cryptocurriencies could be one alternative (roughly the same goes for VC funds and non-listed start-ups by the way).

Well there is a big if though. It is the fact that cryptocurriencies are not financial instruments. So legitimate investor might find it difficult to invest into them. Never mind the volatility and security issues in cryptocurrency exchanges.

…But opportunity to diversify investments is lucrative indeed and serves as a driver to expand the horizons of the financial system.