Financial advisers’ takes on whether to invest in Bitcoin yield answers ranging from “Don’t mistake several months of positive performance with a long-term trend. (Remember Enron?)” to “It represents a wealth creation opportunity that we haven’t seen in 35 years.”
The question takes on even more significance following the disastrous performance last year of the traditional 60/40 investing model, leading to a rethink of the six-decade-long tradition of retail investors allocating 60% of their portfolios to stocks and 40% to bonds (or some type of combination between the two).
There’s no one-size-fits-all answer here. I’m neither a bull nor a bear when it comes to bitcoin, but it’s hard to argue with adding a small allocation as an opportunistic growth play.
Let’s take a look at the numbers. According to Morningstar Inc. calculations, an investor who had a 1% allocation to Bitcoin in a traditional 60/40 portfolio (with the Bitcoin allocation pulled from the equity bucket), would have had slightly worse returns over the past year — a decline of 8.93% versus an 8.77% drop for a traditional 60/40 portfolio. Those numbers aren’t terrible considering Bitcoin tanked close to 40% during that time period.
Over longer periods, the 1% allocation to Bitcoin would have boosted returns dramatically. For the 10 years ending in March, the 1% Bitcoin portfolio handily beat the traditional 60/40 portfolio — 13.3% to 7.8% annually. A slightly larger 2% allocation delivered a slightly worse performance for the past year (a decline of about 9%), but gains of almost 18% annually over a 10-year period. Bitcoin still has a relatively low correlation with other asset classes, but that’s starting to change a bit when it comes to stocks, especially large-cap ones, points out Amy Arnott, a portfolio strategist at Morningstar.
You can’t bank on historical performance, of course, and it’s hard to imagine Bitcoin seeing the the same tenfold price increase it experienced over the past decade. Still, it seems poised to edge higher and now may be a good time to get in relatively cheap.
Bloomberg Intelligence senior macro strategist Mike McGlone says he expects it’s “only a matter of time” before Bitcoin reaches $100,000 because it has something very rare — definable diminishing supply, but it’s still in the early days of adoption. “Bitcoin is well on its way to becoming global digital collateral in a world going that way,’’ McGlone says. “Bumps in the road are expected but the overall trajectory seems quite enduring.’’
Goldman has also said that Bitcoin could eventually hit $100,000 if investors accept its use as “digital gold.” Bloomberg Intelligence’s Jamie Douglas Coutts, a senior market structure analyst, points to how Bitcoin just recorded its second-best first quarter performance in a decade — a strong first quarter has typically resulted in higher year-end prices. Notably, during previous periods of financial turmoil, when a key indicator of risk for the US banking system spiked, Bitcoin fell — this time, even as the gauge has been climbing, bitcoin has continued to rally.
All that is to say that even the optimists will struggle to pick the best time to wade in. With exposure to Bitcoin, comes volatility, underscoring how even a small allocation is really best suited for an investor with a longer horizon, who can tolerate the risk; meaning, not retirees on a fixed income. Morningstar’s calculations show that a 1% allocation introduced a touch more volatility over the past year than a straight 60/40 portfolio, but over a 10-year period, the volatility is almost double.
Given Bitcoin’s liquidity issues and concerns around using exchanges, retail investors who are bullish about its growth may struggle to figure out the best way to buy it. The $14 billion Grayscale Bitcoin Trust is set up so investors can effectively notch gains or losses in Bitcoin in a brokerage account rather than actually buying Bitcoin outright on an exchange with a digital wallet. While that sounds good in theory, the trust has traded at big discounts to the underlying price of Bitcoin, in part because of competition. And its 2% fees are especially high.
A better option for some investors would be if the Grayscale trust converts to an ETF, something it’s been trying to do. So far its attempts have been rejected by the Securities and Exchange Commission, but if it succeeds in its appeal, an ETF structure (where shares can be created and redeemed in line with demand) would likely track Bitcoin’s price better than a trust, which basically operates like a closed-end fund.
Beyond Grayscale, regulatory changes for the entire industry are ahead, making investing in Bitcoin an even bumpier ride. But they could ultimately provide more certainty and help to push the digital coin even higher. For a longer-term investor, starting to make small, regular allocations to Bitcoin seems worth it.
More From Bloomberg Opinion:
• Henry Ford and the Lesson Crypto Bulls Must Learn: Aaron Brown
• Matt Levine’s Money Stuff: The CFTC Comes for Binance
• Crypto Scams and Modern Capitalism Are Siblings: David Fickling
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Alexis Leondis is a Bloomberg Opinion columnist covering personal finance. Previously, she oversaw tax coverage for Bloomberg News.
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