Cryptocurrencies like Bitcoin have established themselves as an emerging new asset class, distinct from bonds, equities, and fiat currencies. This recognition took considerable time, but today investors, large and small, are keen on adding more cryptocurrencies to their portfolios.

Bitcoin and cryptocurrencies, in general, remain very risky propositions for the uninitiated, and we often find prudent investors asking ‘how much of your portfolio should be in Bitcoin and crypto?’ In this article, we intend to answer this question and address similar concerns surrounding cryptocurrency investments.

Why invest in Bitcoin and crypto at all?

In order to assess how much crypto to have in your portfolio, we first need to understand why investment in Bitcoin and crypto is warranted at all.

Disruptive technologyAt a fundamental level, Bitcoin and other leading cryptocurrencies have the potential to disrupt the existing financial system across the world. This is the reason for the comments and concerns raised by governments, central banks, the International Monetary Fund and more recently, US Secretary of Treasury Steven Mnuchin.

Crypto-Asset-Class

Source: BitBull’s Investor Presentation; Contact us for more

 

Potential for and history of high payoffThis disruptive quality of Bitcoin (and cryptocurrencies) presents a unique investment opportunity in the future of the global economy, meriting consideration. Bitcoin’s average return since inception has been 993%. You can see additional BitBull research on crypto returns here and here.

bitcoin-Median-Returns

Source: BitBull’s Investor Presentation; Contact us for more

A small investment can mean outsized gainsBecause of crypto’s historically high payoff, even a 1% allocation would have almost doubled returns of a portfolio invested in the S&P 500 in 2017, from 22% to 42%. On the other hand, if the value of crypto were to go to 0, or face a down year such as 2018, the maximum loss would only be 1%. 

Bitcoin-Crypto-Diversification

Source: BitBull’s Investor Presentation; Contact us for more

 

Potential for high returns of diversified, actively managed strategiesPrudent investors pay attention to the correlation between their portfolio investments. Whether it is stocks, bonds, gold or real estate, it is important to have diversification so that an adverse economic event does not impact the entire portfolio in the same way.

Bitcoin and the crypto space has shown, time and again, that it does not necessarily follow traditional assets in market action. This lack of correlation makes Bitcoin a very attractive alternative investment.

Bitcoin vs traditional alternative investments

Where most portfolios are heavy on stocks and bonds, the need for diversification is fulfilled by alternative investments, which have traditionally consisted of commodities like gold or foreign currencies; private equity and venture capital; real estate, and others. Bitcoin, in our view, is a very strong contender for a spot in the ‘alternative investments’ allocation in any portfolio and has numerous benefits over traditional candidates.

Venture Capital

While many blockchain and crypto investors choose to make angel investments in blockchain companies, crypto can be seen as a type of “liquid venture capital” where investors get a part of a disruptive technology, while investing in an area that has up to the second pricing, and immediate liquidity (over $10B of Bitcoin trades per day per www.coinmarketcap.com). Emerging technology investments have historically been a high-performing asset, so the liquidity of crypto while enabling exposure to emerging tech has been very attractive to investors. 

Even private equity is now evolving to make room for crypto investments, where equity projects raise funds via cryptocurrencies, including Bitcoin and Ethereum, and the crypto gives ownership of equity, and dividend distribution process is handled over the blockchain.

Bitcoin vs Gold:

Bitcoin and gold are often discussed together, where the former is likened to the latter’s digital iteration. While some of their characteristics do overlap (mining, limited supply, store of value), gold is less liquid (due to physical storage and movement constraints) and does not present the same opportunity for growth and return as Bitcoin. Within the crypto industry, many believe that Bitcoin is superior to gold for many reasons and has the potential to be used alongside gold, and yet has about 50x to grow in value to be on par with gold.

BitcoinvsGold

Ray Dalio, the head of Bridgewater Capital, recently spoke in July 2019 regarding alternative assets. He said:

“Those that will most likely do best are those that do well when the value of money is being depreciated and domestic and international conflicts are significant, such as gold. Additionally, for reasons I will explain in the near future, most investors are underweight in such assets, meaning that if they just wanted to have a better-balanced portfolio to reduce risk, they would have more of this sort of asset. For this reason, I believe it would be both risk-reducing and return-enhancing to consider adding gold to one’s portfolio.”

While not naming Bitcoin by name, he further hinted at the future of crypto by adding: “Central banks doing more of this printing…will lead investors to increasingly prefer alternative forms of money (e.g. gold) or other storeholds of wealth”.

Real Estate:

Similarly, real estate, though a very stable avenue for alternative investments, is significantly less liquid, and the market price is considerably less reliable. Bitcoin, on the other hand, is traded 24 hours, 7 days a week and its spot price is readily accessible through various channels and exchanges.

Like with equity, emerging crypto assets have not only replicated equity ownership but also tokenized real estate ownership, so many real estate ventures are now emerging within crypto assets. 

Fiat Currencies:

Moreover, fiat currencies, which provide security and liquidity, also prove to be poor investments in comparison to Bitcoin due to their inflationary nature (whereas Bitcoin is technically a deflationary currency). While the value of one US Dollar has gone down 97% over time, Bitcoin has a finite amount that will ever be created, and its value has gone up over time. 

However, these arguments do not endorse a complete substitution of all alternative investment assets with Bitcoin, they merely establish that the leading digital currency, with its unique value proposition and high-risk-high-reward nature, merits a spot in any well-managed portfolio.

Portfolio allocation for Bitcoin and Cryptos

Having established the purpose of having Bitcoin and cryptocurrencies in an investment portfolio, we can discuss actual allocation, which comes down to an individual’s appetite for risk and consideration of both short and long-term goals. Saving for retirement, for instance, is a long-term investment, and we would say anywhere between 0% – 5% is a good start. For short-term objectives, a 5% – 10% allocation with active balancing every 6 months would be a prudent strategy.

Given the inherent volatility of crypto markets, rebalancing regularly is critical to generating maximum returns. This necessitates active management which takes the market’s up and downsides into consideration. For some investors, it may also make sense to opt for an actively managed crypto fund (versus a passive investment such as an index). Again, this is due to the volatility in crypto and the benefits of a fund which actively works to profit off of that volatility.

To learn more, please refer to our guide on investing in Bitcoin and cryptocurrencies, which discusses the various options available to investors seeking increased exposure in cryptocurrencies. You can also schedule a call with one of our representatives to discuss the strategies and results from our funds, and read much more research, at www.bitbullcapital.com.

Disclosure:

As of the publication date of this report, BitBull Capital Management LLC and its affiliates (collectively “BitBull”), others that contributed research to this report and others that we have shared our research with (collectively, the “Investors”) may have long or short positions in and may own options on the token of the project covered herein and stand to realize gains in the event that the price of the token increases or decreases. Following publication of the report, the Investors may transact in the tokens of the project covered herein. All content in this report represent the opinions of BitBull. BitBull has obtained all information herein from sources they believe to be accurate and reliable. However, such information is presented “as is,” without warranty of any kind – whether express or implied.

This document is for informational purposes only and is not intended as an official confirmation of any transaction. All market prices, data and other information are not warranted as to completeness or accuracy, are based upon selected public market data, and reflect prevailing conditions and BitBull’s views as of this date, all of which are accordingly subject to change without notice. BitBull has no obligation to continue offering reports regarding the project. Reports are prepared as of the date(s) indicated and may become unreliable because of subsequent market or economic circumstances.

Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This report’s estimated fundamental value only represents a best efforts estimate of the potential fundamental valuation of a specific token, and is not expressed as, or implied as, assessments of the quality of a token, a summary of past performance, or an actionable investment strategy for an investor.

This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment or token discussed herein.

The information contained in this document may include, or incorporate by reference, forward-looking statements, which would include any statements that are not statements of historical fact. These forward-looking statements may turn out to be wrong and can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and other factors, most of which are beyond BitBull’s control. Investors should conduct independent due diligence, with assistance from professional financial, legal and tax experts, on all tokens discussed in this document and develop a stand-alone judgment of the relevant markets prior to making any investment decision.

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