While Bitcoin can be a risky asset, its historical outperformance to the S&P 500 may help ally the fears of some investors.(Getty Images)
Bitcoin (BTC) is the most traded and popular cryptocurrency in the world.In a crypto market of close to $2 trillion, Bitcoin accounts for about $750 billion of value as of March 11.
Bitcoin’s price is infamous for its volatility.After humble beginnings in 2009, the coin crossed $1,000 for good in 2017, then followed a steep but bumpy path to an all-time high of roughly $69,000 in November 2021.It then scraped as low as $35,000 in January 2022 before rebounding to its current market price of about $39,000.
But this volatility hasn’t held Bitcoin bulls at bay.A Goldman Sachs analyst predicted in January that Bitcoin could go beyond $100,000 if it becomes accepted as a gold alternative.
While Bitcoin may not yet share gold’s status as a store of value, the crypto king is gradually gaining acceptance and could have a place in your investment portfolio depending on your goals and risk tolerance.
Here are some things to remember if you’re thinking about investing in Bitcoin:
How does Bitcoin fit into your investment portfolio? Risks of owning cryptocurrencies.
The future of Bitcoin.
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How Does Bitcoin Fit Into Your Investment Portfolio? Unlike the stock market, which opens and closes at set times during the week, Bitcoin is accessible to buy, sell and trade 24/7, along with other cryptocurrencies .Crypto investors can access Bitcoin on a number of cryptocurrency exchanges.While you can make crypto trades at any time of the day, it’s best to participate in the crypto market when trading activity is high, to ensure enough liquidity to get a favorable price.
Some investors have turned to Bitcoin because they see it as uncorrelated with stocks, making it an option as a portfolio diversifier.However, since Bitcoin’s price is volatile, experts say having a lower portfolio allocation to Bitcoin can help boost returns without having too much exposure to portfolio losses.
Retail investors should limit their holdings in Bitcoin to 1% to 3% of their portfolio, since it could “lose a lot of its value in a short amount of time,” says Alex Chalekian, CEO of Lake Avenue Financial in Pasadena, California.
“One of the biggest reasons for adding Bitcoin to a portfolio is having exposure to a cryptocurrency, which can be a non-correlated asset to the existing stocks and bonds in a traditional account,” he says.
However, there is recent evidence that Bitcoin’s correlation to stocks is increasing, especially as more investors, both individual and institutional, come into the crypto market and as more Bitcoin-related investments become available to a wider audience.
There are several ways to get exposure to Bitcoin.If you believe investing directly in Bitcoin would present too much risk, you can invest in a Bitcoin exchange-traded fund like the ProShares Bitcoin Strategy ETF (ticker: BITO ) or VanEck Bitcoin Strategy ETF ( XBTF ).
Investors can also add Bitcoin stocks , or companies that either work in the crypto industry or have Bitcoin on their balance sheets.Some of these Bitcoin stocks include Coinbase Global Inc.( COIN ), PayPal Holdings Inc.
( PYPL ) and MicroStrategy Inc.( MSTR ).
This strategy allows investors to add Bitcoin exposure while managing volatility risk.
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How to Invest in Cryptocurrency.]
Risks of Owning Cryptocurrencies Investing in Bitcoin can be challenging for some because of the large fluctuations in its price.The volatility of Bitcoin is far greater than that of stocks.This makes Bitcoin a riskier asset, but its historical outperformance to the S&P 500 encourages many investors to take some additional risk in exchange for potentially higher returns.
There are many reasons Bitcoin is volatile.First, there is speculation around the future utility of Bitcoin and cryptocurrencies.
Investors need to view Bitcoin as a “very good vehicle for someone who is truly a speculator – either a bull or a bear,” says Robert Johnson, a finance professor at Creighton University.
BTC could rise exponentially in value, collapse again or do both repeatedly.Investors can only speculate on the future price of Bitcoin because it has no intrinsic value, unlike gold, he says.
Cyberattacks are another risk that Bitcoin faces.Hackers target cryptocurrency exchanges, where billions of dollars of market cap have been lost in the cryptocurrency market due to hacking since Bitcoin was launched in January 2009 in the aftermath of the Great Recession.
For investors who are environmentally conscious, it’s important to be aware of the impact Bitcoin operations have on the environment.
The Bitcoin network is maintained through Bitcoin mining , which involves verifying transactions and maintaining the integrity of the blockchain network.This process is called “proof of work” and requires a high volume of computing power to function, which results in high energy consumption.
If your investing strategy carries an element of environmental, social and governance , or ESG, keep in mind that Bitcoin mining can challenge those principles.
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7 Best Cryptocurrency Mining Stocks ]
The Future of Bitcoin As more people become comfortable with owning crypto assets and trading in the crypto market, the cryptocurrency market cap will grow, the crypto-economy will expand and that will bring more visibility to Bitcoin, the token’s advocates say.
“As Bitcoin awareness continues to grow, many individuals and financial industry experts have decided that it’s time to have Bitcoin as a part of their investment portfolios,” says Ron Levy, CEO and co-founder of The Crypto Company.
Bitcoin is increasingly being seen as a store of value, or an asset that maintains its value in the future.Gold has historically held that title and still does, but Bitcoin has been challenging that, leading some observers to even call it “digital gold.”
One of the main concerns about the Bitcoin network, which uses the proof-of-work consensus, is that the blockchain consumes a lot of energy.Also, there is more congestion as more Bitcoin investors come on to the platform, and fees associated with each transaction can add up.But there is an alternative consensus mechanism called “proof of stake,” which rival blockchain Ethereum is anticipated to roll out in 2022.
If Bitcoin also switches over to proof of stake, this may help improve some of the network’s challenges.The proof-of-stake consensus mechanism’s theory is similar to proof of work, but is more energy-efficient and allows for more scalability.This change may help the Bitcoin blockchain network run more smoothly and encourage more Bitcoin investor participation.
The future of Bitcoin will likely also be more closely regulated.President Joe Biden in March issued an executive order on cryptocurrency regulation to provide more direction and clarity on the U.S.
policy as it relates to digital assets.Advocates of Bitcoin’s wider adoption see this as a much-needed step for the public to better understand Bitcoin and crypto’s role in the global financial system.
Levy says Biden’s executive order on crypto regulation is a “huge milestone” for crypto and further enhances “the legitimacy and long-term outlook of the space, which bodes well for Bitcoin, which is still king, at least for now.”
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