Despite its high volatility, more and more attention is channeled towards Bitcoin. However, is Bitcoin worth investing in despite all this attention?
Some crypto investors have embraced Bitcoin due to its correlation to returns in the stock market that remains low.
The high volatility of Bitcoin prices makes lots of investors to be mindful of investing in the coin. Yet, other investors see it as owning an asset that is backed by venture capital since the cryptocurrency has been accepted by lots of people as an alternative asset.
Bitcoin is still the largest digital currency in the world considering market capitalization. It reached an all-time high of $63,558 in April 2021. Ethereum is the second-largest cryptocurrency in terms of market capitalization. When Bitcoin crashed below $50,000 on the 23rd of April, it also caused the prices of Ethereum and other cryptocurrencies to fall, leading to a $200 billion loss in the cryptocurrency market in a single day.
This continued volatility, coupled with the lack of regulation, makes it risky to invest in Bitcoin and other digital currencies. This is why most institutional investors (like pension funds, hedge funds, and retirement companies) are reluctant to invest in them.
If you are thinking about investing in Bitcoin, you need to understand that Bitcoin investment is a means of diversifying your portfolio. You should also understand that there are risks associated with investing in Bitcoin. It’s also important to know how to invest in Bitcoin.
<< Read: Simple Ways To Invest In Bitcoin >>
Bitcoin and The Diversification of Portfolio
According to Jodie Gunzberg, the chief institutional investment strategist at Morgan Stanley Wealth Management, some investors have invested in Bitcoin because its correlation in the stock market is low. “Bitcoin may provide diversification to a portfolio as it has nearly zero 3-year correlations with other assets, which is important given the rising and positive correlations that many asset classes have shown with mega-cap tech stocks,” she says. “A small allocation to Bitcoin in a traditional portfolio may improve returns and risk-adjusted returns without significantly increasing volatility or maximum drawdowns.”
An increasing number of pension funds, as well as foundations and endowments, have added Bitcoin to their portfolios over the past two years. They include the largest asset manager BlackRock and Massachusetts Mutual Life Insurance Co. The Fairfax Retirement Employees’ Retirement System and Fairfax County Police Officers Retirement System invested in blockchain technology and Bitcoin via investments in two Morgan Creek Digital funds in 2018 and 2019.
Different family offices, asset managers, pension and hedge funds, endowments, and foundations invest in Bitcoin through Boston-based Fidelity Digital Assets.
Alex Chalekian, the CEO of Lake Avenue Financial in Pasadena, California, advised retail investors to limit their investments in Bitcoin to 1% to 3% of their portfolio because it is capable of losing its value within a short period.
According to him, “One of the biggest reasons for adding Bitcoin to a portfolio is having exposure to a cryptocurrency which can be a non-correlated asset to the existing stocks and bonds in a traditional account.”
