Undeniably, the volatility of Bitcoin (BTC1.87%) has been a key factor in deterring many investors from incorporating this top-ranking cryptocurrency into their investment portfolios. Yet, as we navigate through an ever-evolving digital era, there is a growing body of evidence suggesting that even a small stake in Bitcoin could significantly enhance the long-term performance of an investor’s portfolio.
Observation on Purchasing Bitcoin
Digital currencies like crypto have an inherent high volatility and could be more prone to market disruptions than conventional securities. Those possessing cryptocurrencies aren’t privy to the same protective regulations for registered securities. These include the prospective regulatory framework for crypto.
Digital currencies don’t have the backing of institutions like the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation. When you buy BTC, only venture with capital you’re prepared to risk.
What makes Bitcoin a Necessary Investment Portfolio?
Bitcoin is the world’s only asset with a verifiable scarcity and a fixed supply. Its underlying code, enforced by a decentralized network of thousands of independent node operators globally, dictates the creation of new bitcoins and caps the total amount that can ever exist at 21 million.
The supply of Bitcoin is not affected by price changes, meaning it has a price-inelastic supply. To put it another way, Bitcoin’s supply is both transparent and immutable; it is strictly controlled, algorithmically coded, and overseen by a global community of participants who have faith in the long-term fundamental benefits Bitcoin provides to individuals.
The finite supply of Bitcoin is implemented in code through quadrennial “halving” events. Roughly every four years, the rate at which new Bitcoin is generated decreases by half. These events are projected to continue until around 2140, when the final piece of newly issued Bitcoin is anticipated to be mined. These halving events have resulted in a seasonal effect on Bitcoin’s price.
Bitcoin as a Measure to Counteract Inflation
ETFs present a crucial opportunity for diversifying investment portfolios. Incorporating assets like Bitcoin is suggested as a means to spread risk and vary return profiles. Certain digital assets are viewed as an excellent hedge against inflation and are recommended as a necessary component of any asset collection.
It’s also pointed out that the hidden burden of inflation has been steadily outpacing economic growth, leading to a decline in the purchasing power of households. Recent data indicates an inflation rate of 22% compared to a 5-6% growth in the overall economy. This disparity suggests a real-term wealth reduction of approximately 16% for the average household.
Optimizing the 60/40 Portfolio Approach
For an extended period, financial strategists have posited that a balanced portfolio, consisting of 60% stocks and 40% bonds or other fixed-income assets, could provide a favorable risk-return trade-off for investors prepared to shoulder a moderate level of risk.
This 60/40 portfolio approach has evolved into a time-tested investment strategy, reputed to maintain an apt equilibrium between growth and stability. The equity portion propels the portfolio’s value upwards albeit with increased risk, while the bond component offers a stabilizing effect with its lower, but more predictable returns.For the typical household, Bitcoin ETFs might present a diversification opportunity, suggesting an 1% to 5% allocation into cryptocurrencies.
Endnote
Investors pondering the addition of Bitcoin to their asset mix should place a high emphasis on risk, due to the inherent instability of the cryptocurrency market. Unlike the established track records of the stock and bond markets, Bitcoin’s comparatively brief existence makes it challenging to predict its returns with any certainty.
