The Economist Labels Bitcoin ‘A Nobel Prize-Winning Diversification’ Strategy

Bitcoin has been described in many ways previously both by its supporters and skeptics. Many Bitcoin proponents hold the opinion that the pioneer cryptocurrency stems from altruistic roots that make it paradigm-changing for the finance and economic sector of the entire world.

The Economist, a notable international weekly newspaper, has recently described Bitcoin as a “Nobel prize-winning diversification strategy” that is wise to add to an investment portfolio.

The newspaper – which is notable for its coverage of world politics, economics, business, and technology – reached this conclusion by analyzing the merits of adding Bitcoin to an investment portfolio using the recommendations of award-winning economist Harry Markowitz.

Harry Markowitz’s 1952 Journal of Finance paper which later won him a Nobel prize in economics in 1990, is attributed to being the foundation of modern portfolio theory. In the paper, he laid out a mathematical framework for choosing an optimally diversified spread of assets. Basically, he posits that diversification can reduce volatility without sacrificing returns if the correlation between all of the assets within the portfolio can offset the risk of anyone component of it. 

The Economist, applying the paper’s recommendation, posited that bitcoin has an edge in bringing diversification to a portfolio as it has been shown to have high returns during its 10 years life span, despite also being highly volatile. Looking critically at the returns to Bitcoin, the article found that even in the years that Bitcoin showed high levels of volatility, portfolios containing the pioneer cryptocurrency still displayed better risk-reward characteristics than ones without it.

The article adds that Bitcoin also tends to be uncorrelated with other investment vehicles such as bonds, real estate, and stocks sourced from all geographies, as it has charted its own course in the market. By their analysis, since 2018 the correlation between bitcoin and stocks of all geographies has been between 0.2-0.3, with an even weaker correlation shown in longer time frames.

However, the columnist concedes that the argument was not necessarily enough to convince skeptics that Bitcoin was a wise asset to add to a portfolio. Bitcoin skeptics tend to point to the fact that the cryptocurrency has high energy requirements that make it not too friendly to the environment. There is also the argument that has been raised by notable skeptics including Nasim Taleb and John Paulson about the intrinsic value of Bitcoin and the persistent potential it has of having no value in the future.

Despite these criticisms, Bitcoin proponents do not concede and have argued that Bitcoin’s intrinsic value is in the service of value transfer it offers. They have also added that Bitcoin, which incentivizes participants to keep it secure and running, has overcome the risk of ever going out of operation. Notably, there have been several calls for the pseudonymous creator of Bitcoin, Satoshi Nakatomo, to be awarded the Nobel prize in economics as well as a Nobel peace prize.

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