- Price volatility notwithstanding, virtual currency is here to stay, said Ric Edelman, founder of Edelman Financial Engines.
- Allocating 1% of a portfolio toward bitcoin could give exposure to this asset class without damaging finances, Edelman said.
- At its zenith on Dec. 15, 2017, one bitcoin was worth close to $20,000. The price is currently around $9,300.
If you can’t beat the crypto crowd, it might be time to join them, experts say.
Virtual currency and its underlying technology, blockchain, are here to stay – and that means both will play some role in investors’ lives.
“It’s actually very hard to decouple blockchain and bitcoin,” said Sunayna Tuteja, head of digital assets and distributed ledger technology (DLT) at TD Ameritrade.
She spoke at the TD Ameritrade LINC conference in Orlando, Florida, on Wednesday.
“On the one end, how do we commercialize the value of DLT and blockchain to bring more innovation to traditional markets?” Tuteja asked. “On the other end of the spectrum: How do you tap into this nascent asset class?”
Cryptocurrency – at least bitcoin – has staying power. “Because there’s a fixed number of bitcoin, it’s inflation-proof and it’s virtually instantaneous,” said conference speaker Ric Edelman, founder of Edelman Financial Engines.
Even investors in retirement plans are dipping a toe into the asset class.
In the third quarter of 2019, the Grayscale Bitcoin Trust, which tracks the price of the cryptocurrency, was the fifth-largest holding among millennial investors in Charles Schwab’s self-directed brokerage accounts.
Self-directed brokerage accounts are sometimes offered within retirement plans and allow investors to select individual stocks, bonds and other assets that aren’t on a 401(k) plan’s general investment menu.
The price of bitcoin surged to its zenith on Dec. 15, 2017, when one unit of the virtual currency was valued at $19,650. The price cratered a year later, slumping to $3,183 on Dec. 14, 2018.
As of Jan. 30, one bitcoin is equal to about $9,300.
Volatility notwithstanding, this virtual currency also carries little correlation with other asset classes investors may hold in their portfolio, including stocks and bonds, Edelman said.
A 1% allocation to bitcoin – that is, going from 60% in stocks and 40% in bonds to 59% in stocks, 1% in bitcoin and 40% in bonds — just might be enough to give investors the benefit of diversification without risking the whole portfolio, Edelman said.
“We need to acknowledge that 1% allocation isn’t going to materially harm a client,” he said. “It isn’t going to prevent them from achieving their financial goals, and won’t damage their personal finances.”
Making a tiny allocation toward bitcoin doesn’t absolve investors of the need to do their homework before buying, say experts. They should get schooled on digital assets, as well as the underlying blockchain technology, first.
“Don’t consider investing unless you understand the technology,” said Edelman. “Otherwise, you’re not investing; you’re spending.”
Investors hoping to jump into the crypto pool should approach it with a long-term mentality and prepare to ride out volatile times – including the chance of a 100% loss from that digital currency, he said.
Finally, don’t forget that if investors acquire, sell or exchange cryptocurrency, they’ll need to report it to the IRS. The tax agency treats bitcoin holdings as property, the same way it would regard stocks and other investments.
Cryptocurrency exchanges may provide investors with a Form 1099-K detailing capital gains and losses, but there is no guarantee that they’ll get one.
That means it’s up to bitcoin owners to track their basis – their original investment in the virtual currency — and their transactions for accurate tax reporting.
Op-ed: Small amounts of bitcoin can have a positive impact on your portfolio
- As more investors eye cryptocurrencies such as bitcoin, it’s key to keep in mind that many asset classes once thought too volatile for average investors are now common.
- Some recent research finds small weightings of bitcoin have an outsized positive impact on risk-adjusted returns and diversification relative to other alternative assets.
When a financial advisor discusses the appropriate asset allocation for a portfolio, they are essentially trying to construct a plan that maximizes expected returns based on a given level of risk.
The advisor pays less attention to the behavior of an individual security and instead focuses on how different asset classes work together as a group.
So, what is bitcoin’s role in an investment portfolio and does it make sense to incorporate it?
Conventional wisdom suggests that while bitcoin has delivered great returns, it will add substantial risk to a traditional stock/bond portfolio.
With that said, it’s important to remember that many asset classes that are now commonplace in a portfolio were at some point considered far too volatile for the average investor. We don’t give it a second thought to include emerging markets or technology stocks into an allocation today, and yet there was a time when the pundits believed they were far too risky.
Cryptocurrency Index Fund: Top 20 Crypocurrencies
CRYPTO20 provides a way to track the performance of the crypto markets as a whole by holding a single crypto asset. Index funds have consistently beaten the average managed fund since their inception.
RAD 30: Top 30 excluding Bitcoin and Etherium
The Rad 30 Crypto Composite (RAD 30) tracks thirty crypto assets across 10 sectors, similar to how the S&P 500 and the NASDAQ Composite track stocks. The RAD 30 presents a diverse view of decentralization — the RAD 30 strays away from Bitcoin, Ethereum, and other large crypto assets (in terms of market cap).
The sectors included in the RAD 30 are the sectors that are the most prone to decentralization and have the largest market opportunities. The crypto assets included in the RAD 30 are the best positioned crypto assets in each sector.
Is Bitcoin a Safe Haven?
Some crypto advocates have argued Bitcoin can be a good safe haven for investors when other markets get stormy. Unlike national currencies, Bitcoin is not linked to any government or national economy. There’s also an eventual cap on its supply. Crypto fans say that gives it an intrinsic value similar to precious metals like gold, Reuters has noted. Bitcoin has also shown an inverse correlation to stocks in the past, according the news outlet.
There are grounds to question the safe-haven thesis after the last week, though. Bitcoin tumbled about 15%, Bloomberg reported Friday morning. That’s its worst five-day slide since November. Other cryptocurrencies were faring better, but only slightly. A Bloomberg index that tracks other large digital currencies in addition to Bitcoin was down about 12%, its worst performance in four weeks.
“People thought at certain points in the last year or so that cryptocurrencies would become the flight to safety trade,” Matt Maley, an equity strategist at Miller Tabak + Co. was quoted saying. “The cryptocurrency is losing some of that luster of being considered a safe asset.”
This week certainly would appear to qualify as a good test for an asset’s safe-haven bona fides. There was a market meltdown in Argentina, escalating trade tensions between the U.S. and China, inversion of the Treasury yield curve (viewed as a recession indicator), grim economic news from Germany, and anti-government protests in Hong Kong.
Of course, some of Bitcoin’s losses this week likely stemmed from crypto-specific news: The SEC has again delayed a decision on two ETFs tracking Bitcoin.