As Bitcoin increases in price, more investors are pondering the cryptocurrency’s underlying investment case and its role in client portfolios.
Much of this conversation revolves around Bitcoin’s status as a store of value. Bitcoin is just 12 years old, young by the standards of financial assets. One of the biggest questions over those 12 years has been its validity as a store of value.
For years, gold has been a safe haven staple for investors considering a physical store of value. Gold cannot be duplicated like fiat money and holds immunity from short-term interest rate decisions by the Federal Reserve. However, some cryptocurrency experts posit that Bitcoin could supplant gold as a store of value over time.
Data confirm more smaller investors are looking at Bitcoin as a legitimate store of value.
“Bitcoin may potentially increase portfolio diversification because of its low correlation to traditional asset classes, including broad market equity indices, bonds and gold,” notes Gabor Gurbacs, VanEck director of digital assets strategy.
Bitcoin Benefits, Crypto Concerns
Issues such as scalability must also be resolved before cryptos gain wider acceptance. Additionally, regulatory hurdles remain, including central banks in some countries outright banning transactions denominated in cryptocurrencies.
Good news: there are clear benefits to even modest allocations to Bitcoin within broader portfolios.
“An allocation to bitcoin may also enhance the risk and return reward profile of institutional investment portfolios,” says Gurbacs. “As seen in the chart below, a small allocation to bitcoin significantly enhanced the cumulative return of a 60% equity and 40% bonds portfolio allocation mix while only minimally impacting its volatility.”
Institutional investors are playing an increasingly prominent role in the Bitcoin market, and that role is likely to continue growing. For smaller investors, there are tangible benefits to this scenario.
Cryptocurrencies remain largely unregulated, which has deterred many potential investors. The Securities and Exchange Commission has so far rejected exemptive relief for any attempt to roll out a Bitcoin ETF, arguing that there is not enough protection against fraud and market manipulation in the cryptocurrency market.
Increased investment adoption can also spread rapidly, potentially paving the way to long-term upside.
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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.