Over the past decade, Bitcoin has gone from being just a digital currency to a legitimate asset class. And this has sparked some debates in the investment world. Should Bitcoin be part of an investment portfolio? Some experts see it as “digital gold” and a hedge against inflation, while others are skeptical, pointing to its volatility and uncertain regulatory feature. Bitcoin’s role in investment portfolio is a constant topic of debate among investors and financial analysts. There are two categories: those who advocate for its potential benefits and those who warn against its risks.
In this article, let us go through the divided opinions around Bitcoin’s place in investment portfolio and what it means for investors.
Why is Bitcoin Getting Investor Attention?
Bitcoin, the first and most well-known cryptocurrency, has sparked a major debate about its role in investment portfolio. Bitcoin’s rise has been meteoric. It is valued at an all-time high of over $68,000 in 2021, from being valued at less than a dollar in 2010. Thus, Bitcoin has turned early adopters into millionaires. But beyond its price movement, Bitcoin has positioned itself as a unique asset class due to many factors:
- Scarcity: With only 21 million Bitcoins ever to have been mined, its fixed supply has made it comparable to gold as a store of value.
- Decentralization: Bitcoin operates on a decentralized blockchain, free from government intervention, unlike fiat currencies which are controlled by central banks.
- Global Accessibility: Bitcoin is accessible to anyone with an internet connection, making it a worthwhile global asset.
These characteristics make Bitcoin appealing. Especially for those investors who are looking for an alternative to traditional financial instruments. But is it worth including in a portfolio?
In Favor of Bitcoin
Advocates of Bitcoin argue that it offers many benefits for investors.
1. Hedge Against Inflation
Bitcoin’s fixed supply makes it a potential hedge against inflation. As central banks print money to stimulate economies, fiat currencies lose value over time. However, Bitcoin, on the other hand, is immune to inflationary policies. Bitcoin’s scarcity and decentralized nature give it a unique value proposition during times of financial instability.
2. Diversification
Bitcoin has shown a low to negative correlation with traditional asset classes, such as equities and bonds, making it a valuable tool for diversification. Its low correlation with traditional assets like stocks and bonds makes it a valuable diversification tool. Analysts suggest that even a modest allocation of around 5% can improve a portfolio’s risk-adjusted returns without increasing overall risk. Adding Bitcoin to a portfolio reduces overall risk because its price movements are not tied to the performance of other markets.
3. Potential For High Returns
While Bitcoin is volatile, its long-term returns have been extraordinary to say the least. Investors who were willing to go through some short-term fluctuations have historically been rewarded with huge gains.
4. Strategic Allocation
Financial experts recommend that investors “get off zero” by including at least a minimal allocation to Bitcoin. This approach is believed to optimize portfolio performance by balancing risk and returns effectively. Allocating from the equity portion of a portfolio tends to give the best results in terms of risk-adjusted returns.
Critics of Bitcoin in Portfolio
Even though it has great appeal, skeptics state many reasons to exclude Bitcoin from an investment portfolio;
1. Volatility and Risk
The main concern with Bitcoin is its volatility. Prices can fluctuate dramatically within short periods, which can lead to huge losses for investors. Bitcoin’s price is extremely volatile, with swings of 10-20% in a single day not uncommon. This makes it a high-risk asset that can destabilize a portfolio, especially for risk-averse investors. For example, while Bitcoin reached highs of over $69,000 in late 2021, it also experienced sharp declines, dropping by more than 70% in months.
2. Regulatory and Security Risks
Bitcoin operates in a largely unregulated environment and exposes investors to potential fraud and security risks. Governments all over the world are still figuring out how to regulate Bitcoin. Traditional investments are insured by government bodies and cryptocurrencies are not, which raises the question of the safety of funds held on exchanges. Any future bans, restrictions, or unfavorable regulations can negatively affect its value. For example, when China banned Bitcoin mining and trading in 2021, it led to a huge market downturn.
3. Lack of Intrinsic Value
Critics argue that Bitcoin lacks intrinsic value when compared to stocks (which represent ownership in a company), or real estate (which generates rental income). Bitcoin’s value is largely based on speculation, which makes it unpredictable.
Also Read: How To Purchase Bitcoin Using Cash App Easily?
Final Thoughts
For investors considering Bitcoin, the key is to take a strategic approach. Most financial advisors recommend limiting Bitcoin exposure to a small percentage of the portfolio. Rather than buying a large amount of Bitcoin at once, investors can use the dollar-cost averaging strategy and purchase small amounts regularly.
In the end, whether Bitcoin belongs in a portfolio completely depends on an investor’s goals, risk tolerance, and understanding of the crypto market. For some, it may serve as a high-risk, high-reward component. For others, the volatility and uncertainties make it an unsuitable investment.