Should My Investment Portfolio Include Bitcoin?

Highlights 

• The global market capitalisation of all cryptocurrencies is US$1.93 trillion of which Bitcoin is US$820.51 billion

• US$100 invested in Bitcoin in June 2011, which was then priced at US$32, would now be worth around US$144,000

• How much the percentage of an investor’s portfolio should be assigned to Bitcoin is up for debate. Most financial experts who are pro Bitcoin advise up to 5% while some say only 1%

A question often posed by those looking to get a decent return on their money is: what’s a good investment asset? Offer up Bitcoin as a suggestion and many people will scrunch their noses as if they’ve just been offered a warm glass of horse’s milk.

Bitcoin definitely has a stigma when it comes to selecting a viable asset to put one’s money into. Unlike property and the share market, it’s considered a rogue option. A wild card that’s akin to putting your money onto a roulette table, closing your eyes and hoping for the best.

At this point, is Bitcoin really a bad option when it comes to serious long-term investing?

Bitcoin’s Bad Reputation

In May 2021, legendary investor, Warren Buffet, told the Berkshire Hathaway's annual shareholders meeting that he would “never” invest in Bitcoin. He had a few reasons, but his primary criticism is that Bitcoin has no unique value.

The Chinese government have long declared a similar sentiment to Buffet, saying Bitcoin has no intrinsic value and poses a threat and a medium for executing criminal activity such as money laundering.

As recently as last week, Chinese authorities made their most definitive restrictions on Bitcoin and cryptocurrencies so far, banning exchanges, mining facilities and any trading or purchasing of digital assets whatsoever.

Opinions on Bitcoin and cryptocurrency generally have been strongly divided over the decade or so they’ve existed.

Why would anyone put their hard-earned dollars into Bitcoin when so many other viable investment options - stocks, gold, and real estate – exist.

All The Money in The World

Cash makes up a relatively small portion of the entire world’s monetary value. As of August 2021, there’s around US$40 trillion in circulation. Sounds like a lot, doesn’t it?

Well, compare that to the number: US$1,300,000,000,000,000.

You see, when you consider the world’s wealth – this includes investments, derivatives, and cryptocurrency – that number reaches US$1.3 quadrillion. That’s what that number above represents.

The global market capitalisation of all cryptocurrencies is US$1.93 trillion of which Bitcoin is US$820.51 billion.

Traditional Investments

Although much of the world’s money is kept in savings accounts, inflation is one of the great enemies of cash which sits idle. Therefore people, who wish to see their money protected, invest in assets which they see as both reliable and profitable.

Historically, the greatest investment has been property. For example, consider Australia in the last year until August 31, 2021. The national average return for house prices during that period was 22.1%. Furthermore, over the past 25 years, the annual capital gain for houses and units in Australia has risen by 6.8% and 5.9% respectively.

Beyond real estate, there are also shares. In the 2021 financial year, the S&P/ASX 200 returned 9.69%. Admittedly, this was a good year for Australian stocks, especially considering the Covid-19 lockdowns.

According to data from Vanguard, Australian shares have provided a return of 9.7% per annum for the past 30 years.

But is Bitcoin a viable investment option against those two traditional investments?

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The Misunderstanding of Bitcoin

Bitcoin and cryptocurrency, in general, were originally intended to be a medium of paying for goods and services digitally without the requirement of a third party. It’s the digital equivalent to paying for something in cash, in that it’s anonymous and decentralised – and there are certainly users of cryptocurrency that use it for that very purpose. In fact, an increasing number of big companies have chosen to accept various digital currencies for various goods and services. Microsoft has been one of Bitcoin’s biggest cheerleaders in that regard, allowing customers to use BTC to pay for a host of services like Xbox Live and Skype. Even giant coffee chain, Starbucks, have recently joined the party allowing its customers to use the Bakkt app to pay for their drinks with converted Bitcoin.

However, many of whom have a relationship with Bitcoin use it for trading and investment purposes. Some know what they’re doing and some put their money into it with all the skill of betting at a race track.

As far as longer term investment with Bitcoin, the returns in recent years has been substantial. Take the past 12 months, for example. On October 1, 2020, BTC was valued at US$10,619. Fast forward almost exactly one year to this very moment and BTC is today valued at US$43,640 This is a little more than a 400% increase.

This is the best performing asset over the last year by a very wide margin. Even gold, which some view as a safe haven from inflation and volatile dips in the stock market, has only increased around 36% in the past five years. Compare that to the S&P 500 over the same period, which has increased 104%, and Bitcoin far outweighs gold’s performance enormously, which is ironic considering Bitcoin’s often referred to as digital gold.

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The Problem with Bitcoin 

It’s no mystery why people shy away from Bitcoin as a viable investment option. It’s unequivocally the most volatile of all the assets. Further to that, the reasons pertaining to its performance, at any given time, are difficult decipher. Unlike the stock market where shareholders have access to a company’s prospectus and are updated on any changes regarding its infrastructure and sales data, the reasons for Bitcoin’s price, at any given period, are aloof to the vast majority of investors.

There are several examples of Bitcoin’s abrupt price swings, but the most notorious example occurred in May this year, where, in a matter of weeks, Bitcoin lost more than half its value.

After the fact, there were those that attempted to rationalise as to the reasons for the dramatic plummet in Bitcoin’s price. Some attributed it to billionaire Elon Musk, whose announcement - that his electric car company, Tesla, would no longer accept BTC as payment for their cars – was the catalyst for the massive sell off. Others theorised that China’s crackdown on cryptocurrency in May was the spark that caused the fire that burned Bitcoin to around US$30,000 from its peak of around US$63,000. Some argued it was a combination of both. But who really knows?

What’s undeniable, however, is US$100 invested in Bitcoin in June 2011, which was then priced at US$32, would now be worth around US$127,000. So, the giant dips and rises and volatility aside, the long-term growth of Bitcoin beats any asset class over any ten-year period in history.

So, what now then?

Diversification 

The most sensible move isn’t revolutionary. Investors should diversify their portfolio.

How much the percentage of an investor’s portfolio should be assigned to Bitcoin is up for debate. Most financial experts who are pro Bitcoin advise up to 5%. Some say only 1%.

But the reason why it’s beneficial to have at least a small percentage of your portfolio tied to Bitcoin is because Bitcoin isn’t affected by any other asset class. If the price of shares or property suddenly crash, this doesn’t seem to affect Bitcoin.

Now, it goes without saying that the opposite is also true – a sudden drop in BTC won’t affect any other market. Further to that, sudden drops in Bitcoin are much more common that any other asset, as we’ve seen.

To Invest Or Not To Invest? 

Given the mammoth decade long returns of Bitcoin, it’s fair to say that it’s wise to invest in the premier digital currency.

However, crypto is a relatively new asset class in comparison to shares, gold or real estate. Hence, how Bitcoin will perform over the next ten years is uncertain. How it will perform tomorrow is uncertain.

The best portfolio is a diversified portfolio, and it should include space for Bitcoin.