3 Reasons Why Bitcoin Should Be In Your Investment Portfolio
Is Bitcoin a payment method or an asset? It refers to digital money circulating in a decentralized payment network. The value of the cryptocurrency market is now comparable to the market value of companies like JPMorgan Chase. That is why even the most conservative players on the financial market can no longer ignore it, and investment banks and management companies have begun including analysis of Bitcoin and other digital currencies in their reports alongside US Treasury bonds and metal industry stocks.
The Rules of Investment
The primary rule of investing is to diversify your portfolio. For experienced investors, the reasonable path is to devote no more than 5-10% of the portfolio to risky assets: if the asset performs well, this kind of diversification offers an opportunity for large profits. Should Bitcoin be classified as an asset? And if yes, what peculiarities should be taken into account?
• First, Bitcoin's key quality is its lack of currency inflation. The value changes only as a result of news on the market: Bitcoin legalized in Japan, cryptocurrencies banned in China, various interventions by financial regulators in the world's largest economies, and so on.
• Second, Bitcoin's return does not correlate with other asset types. To illustrate, if you were to calculate the weekly return on capital for all ETFs with over $10 million in assets and compare it with Bitcoin, you would find that the correlation between the two figures is very low: between negative 0.1 and 0.1. On the one hand, that is a disappointment: it makes it hard for the investor to find a guide for the asset's value. On the other hand, low correlation is a strong argument for including Bitcoin as a significant share of a risk portfolio, as it ensures greater diversification: if ETFs of stock indexes go down, your return can be buoyed by cryptocurrency.
• Third, Bitcoin has no limits on transactions and is quite liquid. You can acquire and dispose of the asset at any moment, with no limitations on the amount. One pro for Bitcoin is how well it is protected. It cannot be seized or frozen, such as through sanctions, which is important given the increasing geopolitical tension among the world's major countries.
Let's Talk About Risk
When investing capital in Bitcoin, you have to understand the risks it bears as a vehicle of investment.
Volatility. 2017 showed that investors have to willing to weather huge fluctuations in the asset's value. This is due to the fact that there are not many Bitcoins in circulation, and any transaction involving a significant amount of them can shift the price. Word to the wise: keep your calm and don't give in to the panic, as with any other volatile asset.
Regulation. The world's regulators taking note of cryptocurrencies and attempts to regulate the phenomenon involve both risks and opportunities for action for investors. Several countries are working on bills to regulate the circulation of cryptocurrencies. A positive outcome involves its legalization, a negative outcome results in a complete ban, as happened in China.
Anarchy. The absence of a team to manage Bitcoin, IR, and tech support can also become a problem for investors. No one will help you if you lose the password to your crypto wallet, and no one will make a statement to calm investors on the exchange during hard times.
The opportunities for investing demonstrated by 2017 piqued the interest of not just geeks, but also a broad array of players on the financial market. That is one of the reasons why the cryptocurrency could grow in 2018 and become an attractive asset in your portfolio. There are also worries that the limited number of Bitcoins in circulation will at some point result in a mad rush to buy Bitcoin, which will shoot the price way up.
The Rules of Investment
The primary rule of investing is to diversify your portfolio. For experienced investors, the reasonable path is to devote no more than 5-10% of the portfolio to risky assets: if the asset performs well, this kind of diversification offers an opportunity for large profits. Should Bitcoin be classified as an asset? And if yes, what peculiarities should be taken into account?
• First, Bitcoin's key quality is its lack of currency inflation. The value changes only as a result of news on the market: Bitcoin legalized in Japan, cryptocurrencies banned in China, various interventions by financial regulators in the world's largest economies, and so on.
• Second, Bitcoin's return does not correlate with other asset types. To illustrate, if you were to calculate the weekly return on capital for all ETFs with over $10 million in assets and compare it with Bitcoin, you would find that the correlation between the two figures is very low: between negative 0.1 and 0.1. On the one hand, that is a disappointment: it makes it hard for the investor to find a guide for the asset's value. On the other hand, low correlation is a strong argument for including Bitcoin as a significant share of a risk portfolio, as it ensures greater diversification: if ETFs of stock indexes go down, your return can be buoyed by cryptocurrency.
• Third, Bitcoin has no limits on transactions and is quite liquid. You can acquire and dispose of the asset at any moment, with no limitations on the amount. One pro for Bitcoin is how well it is protected. It cannot be seized or frozen, such as through sanctions, which is important given the increasing geopolitical tension among the world's major countries.
Let's Talk About Risk
When investing capital in Bitcoin, you have to understand the risks it bears as a vehicle of investment.
Volatility. 2017 showed that investors have to willing to weather huge fluctuations in the asset's value. This is due to the fact that there are not many Bitcoins in circulation, and any transaction involving a significant amount of them can shift the price. Word to the wise: keep your calm and don't give in to the panic, as with any other volatile asset.
Regulation. The world's regulators taking note of cryptocurrencies and attempts to regulate the phenomenon involve both risks and opportunities for action for investors. Several countries are working on bills to regulate the circulation of cryptocurrencies. A positive outcome involves its legalization, a negative outcome results in a complete ban, as happened in China.
Anarchy. The absence of a team to manage Bitcoin, IR, and tech support can also become a problem for investors. No one will help you if you lose the password to your crypto wallet, and no one will make a statement to calm investors on the exchange during hard times.
The opportunities for investing demonstrated by 2017 piqued the interest of not just geeks, but also a broad array of players on the financial market. That is one of the reasons why the cryptocurrency could grow in 2018 and become an attractive asset in your portfolio. There are also worries that the limited number of Bitcoins in circulation will at some point result in a mad rush to buy Bitcoin, which will shoot the price way up.