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<p>Diversification might be the best technique available to investors. Diversification allows you to manage your portfolio's risk of losing value, while potentially gaining a better return.</p>

	<p>With diversification, you are basically not going all in on a single investment. The idea is to combine different assets that have prices with no correlation to each other.</p>

	<p>Achieving this can prove difficult, with these type of assets often hard to find. However, diversification can still help manage your portfolio&#39;s price movements and it is worth your effort to find such assets.</p>

	<h2>Diversification And Bitcoin</h2>

<p>The unique nature of bitcoin makes it a key player for diversification. This was highlighted in the <a href="http://research.ark-invest.com/hubfs/1_Download_Files_ARK-Invest/White_Papers/Bitcoin-Ringing-The-Bell-For-A-New-Asset-Class.pdf">whitepaper</a> developed by digital currency exchange Coinbase and ARK Invest.</p>

	<p>The paper highlighted a number of characteristics, including how bitcoin's prices can move freely from that of other assets.</p>

	<h2>A Lower Correlation</h2>

<p>The whitepaper also highlighted that the change in bitcoin's prices was different to other asset classes. A <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2324780">paper</a> produced by the Paris Dauphine University came to a similar conclusion. It stated:</p>

<blockquote>
<em>The bitcoin rate of return presents statistical characteristics that differ markedly from those of other assets, including gold, oil, and hedge funds. In addition, bitcoin investment is attractive because it delivers exceptionally high diversification benefits. This is due to low correlations not only with traditional financial assets but also with alternative investments.</em></blockquote>

<p>With this type of low correlation, digital currencies can reduce the volatility of your portfolio. The following use cases may provide insight into making strong investment decisions. These use cases include scenarios both a weak and strong economy.</p>

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<h2>Investing When The Economy Is Strong</h2>

<p>When the economy is performing well, you can diversify your portfolio with bitcoin by investing in it as a hedge. In a strong economy, potentially dangerous assets such as oil and stocks can push higher.</p>

<p>These type of assets can help raise your portfolio's value. You can complement this with bitcoin assets to reduce the risk of your portfolio losing value if the economy deteriorates. &nbsp;</p>

	<h2>Hedging When The Economy Is Weak</h2>

<p>When the economy is not performing well, bitcoin can still provide significant diversification. For example, a lot of assets plunged significantly in the crash of 2008-2009. Because of this, investors found it harder to protect their portfolios and diversify efficiently.&nbsp;</p>

<p>Even though the financial crisis happened prior to the launch of bitcoin, the digital currency has seen its price go up in the midst of crisis. If bitcoin continues in this manner, investors may be able to use it to hedge against the downside risk of their portfolios. Bitcoin's value could rise steeply if we see the market's aversion to risk go up like it did during the 2008-2009 crisis.</p>

	<h2>A Few Things To Keep In Mind</h2>

<p>When using bitcoin for portfolio diversification, there are a number of things to <a href="https://www.forbes.com/sites/janetnovack/2015/02/05/5-big-mistakes-investors-make-when-they-diversify/#411979395d36">consider</a>. Remember, to achieve effective diversification, you do not have to buy a ton of securities. When your portfolio hits 20 to 30 securities, there is not much benefit in adding more. It will not help reduce portfolio volatility.</p>

	<p>Also, watch out for investment products charging high fees in return for a lot of securities. For example, a lot of mutual funds have 100 - 150 stocks, and charge fees with higher than normal prices.</p>

<h2>Conclusion</h2>

<p>If it is used prudently, bitcoin may a be a great asset for investors to use to diversify. It could bring down your portfolio risk.</p>

<p>In saying that, bitcoin might be more helpful when dealing with portfolio volatility in times of crisis as opposed to when the economy is strong.</p>

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