The biggest story in finance this year has been the rise of cryptocurrencies as a viable asset class. Even those who don’t follow the financial markets know that bitcoin has stratospherically appreciated this year. In global financial markets that have otherwise been the least volatile in history across several asset classes, cryptocurrencies have brought heavy price movement and also made some people a lot of money. The problem is that having a platform to get in and out of trades quickly has been a challenge and those trading these currencies have had to go outside of their own broker to get at these markets. Just2Trade uses third-party providers and gives access to cryptocurrency trading directly for European clients, and all with minimum brokerage commissions. (US clients are expected to be added sometime in the future.) Through the WhoTrades Marketplace we can directly observe portfolios participating in digital currency transactions and see how these traders are constructing their portfolios around their cryptocurrency holdings. Let’s take a look at a few: Portfolio #1 This trader’s yearly gains stand at 65% and virtually all the gains have come in the past month due to the initiation of a bitcoin trade. Over the past year, gains were more or less flat: And then bitcoin took care of things: (Source: Portfolio #1) Bitcoin takes up about 70% of the portfolio’s holdings, while ethereum comprises about 7%. This trader also keeps positions in a mid-cap auto parts company (LKQ) and a small-cap water utility company (CWCO). Normally, if this was an account that was intended for long-term capital appreciation, I would recommend against having so much concentrated into cryptocurrencies, considering the volatility and unproven staying power of the asset class. But for someone trading money they can afford to lose, dabbling in cryptocurrencies can be a viable outlet. Portfolio #2 Here we see a similarly structured portfolio more geared toward speculation/trading rather than something you’d be inclined to do with your life savings. (Source: Portfolio #2) Bitcoin is 62.5% of the portfolio, followed by 19% in silver (SLV) – which at that allocation would be an active bet in favor of the metal rather than something more geared toward diversification – and 20+ year US Treasuries (TLT) capping off the final 18.5%. Though long-term US Treasuries are frequently used as a hedge, in the context of this portfolio it would seem to make little sense as such. TLT has the same volatility as US equities given the duration of the bonds. We also see trading activity in short-term Treasuries. Portfolio #3 This trader has been very active during the year, notching up 174 trades. However, the strategy is relatively straightforward. He picks 25 stocks, weights them approximately equally (largest individual holding is 4.8% of the allocation while the smallest is 1.7%). (Source: Portfolio #3) He diversifies fairly thoroughly such that it has NASDAQ-like volatility. (Historically the NASDAQ has had 70% more volatility than the S&P 500 going from when their most popular ETF equivalent (SPY, QQQ) both started trading simultaneously in 1999 – but only about 25%-30% more if you exclude the tech bubble.) Yet to play the current momentum in the crypto markets, he adds a 12% allocation to ethereum. It, of course, likely started out as much less out of respect for its speculative nature, but grew to become a significant fraction of the portfolio. Conclusion Just2Trade is one of a select few brokers on the market that allows its European clients to buy and sell cryptocurrencies through third-party providers and include them in client portfolios of stocks and other financial asset holdings. As for now, cryptocurrencies are in their infant stages of development, with high volatility, frequent double-digit daily price swings, and little to no regulatory oversight. The introduction of bitcoin futures is also letting more big players into the market, which also changes the dynamics. The risk of loss can be high and we don’t yet know how these markets will perform in different economic circumstances. Should global growth sour, will cryptocurrencies act as safe havens or deflate like risk assets? The safe haven argument held true in certain frontier markets (e.g., Zimbabwe) but can’t be applied generally until we have more market history. So far, bitcoin has shown between a +0.02 to +0.06 correlation to US equities, US Treasuries, high-yield bonds, and gold (with -1.00 being a perfect negative correlation and +1.00 being a perfect positive correlation). We don’t yet know how this may change going forward, or whether it’s legitimately neither a safe haven nor a “risk-on” asset, but rather a diversification asset similar to gold as its very brief history might currently suggest. As always, invest safely and only in line with your personal risk appetite.