Whether you believe Bitcoin is inherently worthless or could eventually head for $650,000, there is little doubt that it has become an asset class of great interest to investors (though perhaps for different reasons than the financial world’s latest obsession: GameStop).
Last month a leading asset manager featured in Investors’ Chronicle magazine even recommended that a reader include a small allocation to the cryptocurrency as part of their retirement savings. Bloomberg Wealth has also written a couple of “how to” guides on Bitcoin investing.
But if Bitcoin really has gone mainstream, what does that mean for your personal finances and investments?
On the face of it, Bitcoin is neither intrinsically valuable, nor is it a reliable store of wealth. It certainly does not produce an income. It does, however, possess two characteristics that could make it a good fit for even the most conservative portfolio.
The first is its volatility. Many view Bitcoin’s volatility with horror. Indeed, the U.K.’s Financial Conduct Authority has repeatedly warned investors off cryptocurrencies for precisely that reason. Between Dec. 2017 and Dec. 2018 the price of Bitcoin fell by almost 85%. But since that nadir it has risen more than tenfold, demonstrating that volatility can cut both ways. The greater an investment’s volatility, the larger the losses but the larger the potential returns.
If I had invested one percent of my retirement savings in a company in the FTSE 100 a year ago, I would pretty much have been wasting my time. My investment would have been too small to add much upside, even had the stock risen 20% or 30%. Indeed, the FTSE actually fell last year. However, had the worst happened and the company declared bankruptcy, I would have only had one percent at stake.
Bitcoin’s volatility offers a greater possibility of meaningful gains, while still only committing the same small, manageable sum. Over the past year, its price has more than quadrupled. Had I invested the same one percent of my retirement (full disclosure: I don’t currently hold any Bitcoin), it would have contributed much more to my portfolio. Thanks to Bitcoin’s volatility, as long as you don’t bet the ranch, there is still the possibility of making a real gain without too much loss.
Its other key characteristic is that it is not a leveraged investment. Unlike the foreign exchange trading programs, which allow inexperienced investors to apply large leverage to trading currencies, your losses with Bitcoin are limited to your initial stake. Most other get-rich-quick schemes, including contract for differences or CFDs, rely on debt to some degree.
With leveraged investments you lose borrowed money almost the instant your investment falls in value. With Bitcoin you generally stand, at worst, to only lose your initial stake — unless, of course, you’ve borrowed to trade in the cryptocurrency too.
It was a relative absence of leverage that was the difference between the bursting of the dot-com bubble in 2001, which resulted in a mild recession, and the 2008 financial crisis, which almost wiped out the entire banking sector. Although some debt was involved in 2001, most of the losses…