The average private investor glancing through the popular press could be forgiven for assuming Bitcoin investors either incredibly brave, completely insane or a little bit of both. The volatility of cryptocurrencies, and of Bitcoin in particular, has led to this form of investment to be treated with the sort of suspicion usually reserved for an angry-looking junkyard dog on a length of rusty chain.
It’s great for making attention-grabbing headlines and selling newspapers, but with any type of investment, volatility is just one of the factors that need to be considered. The point is that a balanced portfolio is, as the name suggests, one that contains different components that react in different ways to market conditions. A blend of high and low volatility investments also sounds, intuitively, like something that makes sense.
Top researchers say “Buy Bitcoin”
Despite, or perhaps because of, its volatility, Bitcoin continues to tempt investors, particularly those in the their 20s. Is it a case of fools rushing in where angels fear to tread? Not really. A recent paper written by respected University of Yale economists Aleh Tsyvinski and Yukun Liu for the National Bureau of Economic Research (NBER) said that every investor should get out there and buy Bitcoin, and that the optimum portfolio should have a Bitcoin holding of at least six percent.
Hedging against macroeconomic factors
Those who see cryptocurrency as a high-risk investment might raise their eyebrows, but the rationale behind the advice is straightforward. Take a look at the macroeconomic factors influencing the global economy right now. US trade sanctions, a Chinese currency in free fall and the risk of no-deal Brexit are among the major headlines.
These have a predictable influence on most investments, such as stocks or conventional Forex. However, Messrs Tsyvinski and Liu point out that cryptocurrencies do not have the same exposure to “most common stock market and macroeconomic factors.” It is similar in principle to the argument that is wheeled out time and again in favor of devoting at least a part of a portfolio to gold and other precious metals. When the broader economy goes one way, these typically go the other. With digital currencies, however, there is not even this inverse relationship – their values, and fluctuations thereof, are subject to different factors entirely.
For this reason, the report’s authors feel that a six percent Bitcoin holding makes sense, and that even those who are staunchly against cryptocurrency should still devote at least one percent of their portfolio to it as a sensible diversification strategy.
The market is climbing aboard
The advice of two of America’s most respected economists is not something that any of us should take lightly. However, the argument in favor of Bitcoin is shared outside the rarefied corridors of academia.
Bart Smith, head of digital assets at a leading trading firm in Philadelphia, told CNBC that investing in Bitcoin is a no-brainer, and that it is rapidly becoming a more logical means of exchange than traditional banking methods. The same pattern is being seen the world over. Postbank, in Germany, polled its investors and found that 30 percent see crypto as a desirable investment, and South Korean news agency Yonhap reported a similar trend among private investors in Seoul.
Skepticism over cryptocurrency is not going to evaporate overnight. However, every investor needs to set his or her preconceptions aside and see cryptocurrency for what it is: An investment option with its own characteristics, and ones that are entirely different from most other forms of investment. In the final analysis, surely that is what a truly diverse portfolio is all about.