The reduction of overall portfolio risk and volatility achieved by combining distinct assets or investment strategies whose returns are not perfectly positively correlated. In crypto investing, this signifies the advantageous effect of holding various digital assets, protocols, or investment types, where the negative performance of one component is offset by the positive performance of another, smoothing overall returns.
Mechanism
The mechanism of diversification relies on statistical properties, specifically the covariance of asset returns. When assets exhibit low or negative correlation, a decline in one asset’s value is less likely to be mirrored by declines in others, thus mitigating portfolio-wide drawdowns. In crypto portfolios, this might involve allocations across different blockchain ecosystems, Layer 1 and Layer 2 tokens, DeFi protocols, NFTs, or stablecoins, each possessing unique risk-return profiles.
Methodology
The strategic methodology for realizing diversification benefits in crypto involves constructing portfolios that systematically incorporate assets with varied risk factors and market drivers. This includes analyzing historical correlation data, assessing the fundamental utility and technological underpinnings of different crypto assets, and dynamically rebalancing holdings to maintain target risk exposures. The aim is to achieve a more efficient frontier of risk-adjusted returns, providing a robust approach to capital preservation and growth in a volatile asset class.
Portfolio margining across asset classes systemically enhances CCP netting by unlocking significant capital efficiency through holistic risk diversification.
SA-CCR recognizes hedging and diversification via a hierarchical system of asset classes and hedging sets, applying full netting for direct hedges and partial offsetting for diversified risks through prescribed formulas.
We use cookies to personalize content and marketing, and to analyze our traffic. This helps us maintain the quality of our free resources. manage your preferences below.
Detailed Cookie Preferences
This helps support our free resources through personalized marketing efforts and promotions.
Analytics cookies help us understand how visitors interact with our website, improving user experience and website performance.
Personalization cookies enable us to customize the content and features of our site based on your interactions, offering a more tailored experience.
