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Bitcoin’s resurgence tempts investors to return to the world of cryptocurrencies, as its price surpasses $35,000, recovering its reputation in the investment arena. This significant development comes at a time when stocks are declining and bond yields are rising, amid the Federal Reserve’s intentions to continue raising interest rates and ongoing geopolitical tensions threatening financial stability. Some advisors believe that adding Bitcoin to investment portfolios could be a good diversification strategy.
Despite accusations of fraud that led to its founder’s downfall and Bitcoin’s previous catastrophic collapse last year, the cryptocurrency is now trading above $16,000. While many wealth advisors still caution against investing in this volatile currency, arguing that it poses risks, others argue that a limited allocation can help diversify one’s investment portfolio and manage risks.
Von Kellerman, Assistant Wealth Advisor at HCM Wealth Advisors in Cincinnati, recommends allocating between 1% and 3% to Bitcoin in a balanced investment portfolio, although this percentage can go up to approximately 5%, depending on the investor’s risk tolerance and portfolio range.
Bitcoin’s status as the leading cryptocurrency gives it an advantage over newer and more volatile cryptocurrencies, including decentralized finance projects that have undergone auditing.
No association with stocks and bonds
Ryan Firth, a financial planner at Mercer Street in Bellaire, Texas, sees Bitcoin’s appeal in its lack of correlation with stocks and bonds, especially in recent months. While the S&P 500 and Nasdaq 100 are down about 8%, Bitcoin has risen 34% since the beginning of September.
Firth believes that the re-emergence of Bitcoin as a potential hedge against inflation due to its immutable and decentralized nature is also noteworthy. Despite interest rate hikes by the Federal Reserve, consumer prices continue to rise.
The potential launch of a Bitcoin exchange-traded fund (ETF) could encourage everyday individuals to add cryptocurrencies to their portfolios more than ever before. While the industry has been trying to launch such a product for years, it has faced frequent clashes with regulatory authorities, who are concerned about the volatile nature of cryptocurrency and the potential for manipulation in the industry.
However, this possibility seems to be improving in recent months. In June, BlackRock Inc. filed to create a Bitcoin ETF, and in August, a judge overturned an earlier decision blocking Grayscale Bitcoin Trust from converting into an exchange-traded fund. These developments are also helping to boost the price of Bitcoin.
Mike Kelley, founder of Kelley Financial Planning in Cincinnati, says launching an exchange-traded fund would be the best way for everyday people to invest in Bitcoin, and recommends keeping allocations below 5%.
“It’s the same recommendation for individual stocks. You strive to maintain diversification in your portfolio and not allow one investment position to overburden your portfolio,” he added.
On a different note, others in the financial consulting world still view Bitcoin as a risky bet, closer to speculation than a long-term investment. In this regard, Bryan Dunkenson, a financial planner in Vero Beach, Florida, said, “Bitcoin, and cryptocurrencies in general, are still an asset class dominated by speculation. They are not securities with a company operating to build their value; rather, the value is merely a market driven by supply and demand.”
Dunkenson advises his clients to only purchase an extremely limited amount, if at all, for speculative and entertainment purposes, especially considering the widespread fraud in this industry.
Meanwhile, we see some financial planners like Daniel Yarger, the CEO of MY Wealth Planners in Longmont, Colorado, questioning the claim that Bitcoin allows for true diversification.
He stated, “Bitcoin is consistently tied to broader stock market movements in terms of gains and losses. Considering that its value is entirely dependent on market sentiment, it is unlikely to cease being a highly volatile asset in the near future.”
Move in opposite directions
Taking last year as an example, in 2022, the value of Bitcoin plummeted by 64%, while the S&P 500 index dropped by 19%. In order for it to truly be a diversification tool, these prices must move in opposite directions.
There is also the fact that it is almost impossible to use Bitcoin as a means of payment for everyday needs, as noted by Eric Roberge, the founder of Beyond Your Hammock, a financial planning company based in Boston. To use it for purchases, you would need to convert it to dollars or another currency, at a time when exchange rates are highly volatile.
He added that for the argument that Bitcoin can serve as a hedge against inflation, it assumes that the cryptocurrency holds inherent value and will reliably retain that value against a certain set of risks.
Roberge continued, “Bitcoin does not come with any guarantee that it will not lose its value in the face of inflation risks or any number of other market risks. It is susceptible to falling to zero, and there is nothing preventing its decline.”