Bitcoin Investment? The question is not if, but how much
Bitcoin is the best performing asset in the history of mankind. Why a portfolio addition of BTC can improve performance and what investors should keep in mind.
„Don’t tell me what you think, show me your portfolio.“ By this, bestselling author Nassim Taleb means the normative power of persuasion. You could also say, „Put your money where your mouth is.“ While Bitcoiners are probably invested in BTC with double-digit Bitcoin Future percentages of their portfolio, conservative investors tend to invest lower values. But which percentage is the right one?
Well, you can’t say that across the board. But one thing can be stated in any case: A portfolio that contains zero per cent Bitcoin makes no sense. Bitcoin is the best asset in the history of mankind. It is currently growing at an average annual rate of 200 percent. And it is also comparatively uncorrelated to assets like stocks or bonds. Diversification with BTC therefore makes sense.
The perfect portfolio
The Bitcoin data service provider Ecoinometrics, a newsletter that looks at relevant metrics in the Bitcoin network on a weekly basis, has compiled the returns of a more or less high Bitcoin allocation.
Those who have held 100 per cent of their assets in the digital gold over the last eight years, for example, have enjoyed an annualised increase in value of 100 per cent. However, such an all-in position is only recommended for Bitcoiners who are able to endure bear markets, some of which last for years. After all, the crypto market has corrected significantly twice in the last eight years. Most recently, in the period from December 2017 to December 2018, the price of the largest cryptocurrency by market capitalisation slid from just under 20,000 US dollars (USD) to 3,000 USD. A price correction of no less than 89 percent.
Dry spells like this wash so-called „weak hands“, i.e. traders who primarily aim for short-term profits, out of the market. What remains are the hodlers, who can then typically cover themselves with cheap sats in bear markets.
Mixing reduces volatility
A less aggressive portfolio composition can significantly reduce the risk associated with volatile assets like bitcoin. Those who hold about 50 percent of their portfolio in Bitcoin and the rest in the S&P 500, i.e. a well-known US stock index, reduce their return to „only“ 63 percent, averaged over eight years. In return, the value of the portfolio decreased by a maximum of 58 percent. For long-term investors who do not want to see their assets shrink by almost 90 per cent within a year, this portfolio is probably the more solid choice.
Even risk-averse investors should consider investing in Bitcoin, writes Ecoinometrics. With 34 per cent Bitcoin, 33 per cent S&P 500 and 33 per cent gold, you still get a 43 per cent return over eight years. The maximum drop, according to Ecoinometrics, was only 45 percent, even if BTC corrects by 89 percent.
So in summary, the bigger the bitcoin position, the higher the return. Bitcoin performance since halving is quite respectable.