Bitcoin’s climb to US$35 000 is helping to restore its reputation in the world of investment advice.
The world’s largest cryptocurrency has more than doubled from last year’s epic collapse, a significant development when stocks have dropped and bond yields are surging. With the US Federal Reserve planning to keep interest rates high, and geopolitical tensions threatening financial stability, some advisors say adding bitcoin to an investment portfolio can be a good way to diversify.
It’s quite a change from last November when FTX’s bankruptcy — which led to the fraud charges that put Sam Bankman-Fried on trial — sent cryptocurrencies into a spiral, with bitcoin trading below $16 000. And while many wealth advisors still caution against getting involved with the asset, which is prone to volatility, others argue a small allocation can help spread out risk in your investments.
“Bitcoin should have a place in any balanced portfolio, from someone in their retirement years to a young person just getting started,” said Vaughn Kellerman, associate wealth advisor at HCM Wealth Advisors in Cincinnati.
He typically recommends an allocation of between 1% and 3%, but that’s inching up to around 5%, depending on an investor’s tolerance for risk and how large their portfolio is. Bitcoin’s “first-mover advantage” as the largest digital currency makes it a safer bet than some of the newer, more volatile coins, including decentralised finance projects that have come under scrutiny.
For Ryan Firth, financial planner at Mercer Street in Bellaire, Texas, bitcoin is appealing because it does not seem to be correlated with stocks and bonds, at least in recent months. Since the beginning of September, the cryptocurrency has risen 34%, while the S&P 500 and the Nasdaq 100 have both dropped about 8%.
Its re-emergence as a potential inflation hedge — due to its fixed supply and decentralisation — is also noteworthy, Firth said. Despite the Federal Reserve’s aggressive rate hikes, average consumer prices are still rising.
A potential exchange-traded fund tracking bitcoin could make it easier than ever for average people to add crypto to their portfolio. Although the industry has been trying to launch such a product for years, regulators have repeatedly scoffed, citing crypto’s inherent volatility and potential for manipulation.
But in recent months, the likelihood seems to be improving: BlackRock filed an application for a bitcoin ETF in June, and a judge in August overturned a prior decision to block converting a bitcoin trust from Grayscale Investments into an ETF. Those developments are also helping to boost bitcoin’s price.
Mike Kelly, founder of Kelly Financial Planning, says an ETF would be the best way for the average person to invest in bitcoin. He also recommends keeping your allocation below 5%. “It’s the same recommendation for an individual stock,” he said. “You want to maintain diversification and not allow one position to crater your portfolio.”
Others in the financial-advisor world still view bitcoin as a risky bet, more akin to betting than long-term investing.
“Bitcoin, and cryptocurrency at large, is still a highly speculative asset class,” said Brian Duncanson, a financial planner. “It is not a security where there is an operating company working to build value, rather the value is purely a supply and demand driven market.”
He recommends his clients only buy a very small amount — if any at all — to use as a fun gamble, especially with the prevalence of fraud in the industry.
Some financial planners like Daniel Yerger, president at MY Wealth Planners, are sceptical of the claim that bitcoin truly provides diversification.
“Bitcoin regularly correlates with the movements of the broader stock market in both market gains and losses, and given that its value is entirely dependent on market sentiment, it is unlikely to cease being an ultra-volatile asset in the near future,” he said.
Take last year for example. In 2022, the price of bitcoin dropped 64% as the S&P 500 fell 19%. To truly be a diversification tool, those prices would need to move in opposite directions.
Then there’s the fact that it’s nearly impossible to use bitcoin as a way to pay for everyday items, said Eric Roberge, founder of the financial planning firm Beyond Your Hammock. To use it for purchases, you’d have to convert it to dollars or another currency, and the exchange rate can fluctuate wildly.
As for the argument bitcoin can serve as an inflation hedge, that assumes the cryptocurrency has an inherent value and will reliably hold that value in face of a certain set of risks, he said.
“Bitcoin has no guarantee that it won’t lose value in the face of the risk of inflation or any number of other market risks,” Roberge said. “Bitcoin can go to zero and there’s nothing really stopping it from doing so.” — Claire Ballentine, (c) 2023 Bloomberg LP