As the cryptocurrency universe evolves, more market observers are warming to the idea of including digital assets as parts of broader investment portfolios.
Typically, those conversations center around Bitcoin because that is the largest digital currency and its credibility as a store of value is on the rise. Still, some analysts recommend restrained allocations to the king crypto.
“Originally conceived as a digital, encrypted alternative to traditional currencies controlled by central banks, bitcoin has also been attracting more interest from mainstream investors,” writes Morningstar analyst Amy Arnott. “For example, BlackRock recently added prospectus language giving three of its mutual funds the flexibility to invest in bitcoin futures. In late 2020, insurance provider MassMutual purchased $100 million in bitcoin in late 2020 for its investment portfolio. And in recent months, several high-profile institutional investors–including Miller Value Partners’ Bill Miller, BlackRock’s Rick Rieder, and Tudor Investment’s Paul Tudor Jones–have touted bitcoin as long-term investment with significant upside potential, even after its previous surge.”
Dealing with Bitcoin’s Volatility
One of the primary reasons many investors are reluctant to hold crypto assets over the long-term is volatility.
“Bitcoin investors have been on a wild ride lately. After dropping about 74% in 2018, the digital currency nearly doubled in price in 2019, and then nearly quadrupled during 2020,” notes Arnott.
Many market participants still view it as a complicated, volatile instrument. While the largest cryptocurrency has had its bouts with turbulence, some investors may be surprised to learn bitcoin actually has some favorable volatility statistics.
“Bitcoin’s limited supply also makes it a potential hedge against long-term inflationary pressures. With the Federal Reserve printing money at an unprecedented rate, the market is currently pricing in a five-year breakeven inflation rate of 2.18%, which would be higher than the unusually benign inflation we’ve seen in recent years,” adds Morningstar. “Bitcoin has often (though not always) historically had a negative correlation with the U.S. dollar, which started losing ground in March 2020 after a generally strong upward trend over the previous decade. Bitcoin’s future value partly depends on widespread acceptance and usage as an alternative currency. Unlike traditional currencies, it’s not controlled by central governments. In that sense, it’s the ultimate insurance policy against weakness in the U.S. dollar or a collapse in mainstream financial systems.”
For more news, information, and strategy, visit the Crypto Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.