The questions of all questions, invest in Bitcoin now? Is not whether, but how much!
Bitcoin is the best performing asset in human history. Why adding BTC to a portfolio can improve performance and what investors should consider.
“Don’t tell me what you think, show me your portfolio.” By this bestselling author Nassim Taleb means the normative power of conviction. You could also say: “Put your money where your mouth is.” While Bitcoiners are likely to have double-digit percentages of their portfolios invested in BTC, conservative investors tend to invest lower values. But which part is the right one?
Well, you can’t say that across the board. One thing can be said in any case: a portfolio that contains zero percent Bitcoin does not make sense. Bitcoin is the best asset in human history. Its annual growth is currently 200 percent on average. And it is also comparatively uncorrelated to assets such as stocks or bonds. Diversification with BTC makes sense.
The perfect portfolio
The Bitcoin data service provider Ecoinometrics, a newsletter that deals with relevant metrics in the Bitcoin network on a weekly basis, has compiled the returns on a more or less high Bitcoin allocation.
Anyone who has held 100 percent of their assets in digital gold over the past eight years can look forward to an annualized increase in value of 100 percent. Such an all-in position is only recommended for Bitcoiners who are able to survive bear markets that have been going on for years. After all, the crypto market has corrected significantly twice in the past eight years. Most recently in the period from December 2017 to December 2018. In the past bear market, the price of the largest crypto currency by market capitalization slipped from just under 20,000 US dollars (USD) to 3,000 USD. A course correction of no less than 89 percent.
Lean spells like this wash so-called “weak hands”, i.e. traders who are primarily aiming for short-term profits, out of the market. What remains are the Hodlers, who can then typically stock up on cheap sats in bear markets.
Admixture reduces volatility
A less aggressive portfolio composition can significantly reduce the risk associated with volatile assets like Bitcoin. Those who hold around 50 percent of their portfolio in Bitcoin and the rest in the S&P 500, 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 percent within a year, this portfolio is probably the more solid choice.
Even risk-averse investors should consider investing in Bitcoin, writes Ecoinometrics. With 34 percent Bitcoin, 33 percent S&P 500 and 33 percent gold, you can still achieve a 43 percent return over eight years. The maximum drop was only 45 percent, according to Ecoinometrics, even when BTC corrects it by 89 percent.
In summary, one can say: the larger the Bitcoin position, the higher the return. The Bitcoin performance since the halving is quite impressive.
At the same time, the percentage size of the BTC position also increases the risk.
So there is no such thing as a magic number, it is more important to achieve a good mix of risk and return through clever portfolio constellations. Gold, the S&P 500 and Bitcoin are sometimes more and less strongly correlated with each other. In bull markets in particular, there is a decreasing correlation to competing assets. A Bitcoin investment then becomes twice as attractive. Finally, uncorrelated assets lower the risk of the portfolio as a whole. In addition, Bitcoin is still at the beginning of its monetization – so there is definitely growth potential.
It is impossible to say in general what percentage of their assets investors should invest in BTC. But one thing is clear: ignoring Bitcoin in your portfolio is negligent.