Cryptocurrency is still a relatively young asset, comprising features of currency units, securities and commodities. Low entry threshold to cryptocurrency market as well as extreme volatility of cryptocurrencies allow investors make multiple returns as well as lose their fortunes in a matter of days. Does Bitcoin need to be in your investment portfolio? What is the safest strategy for cryptocurrency investment? These are two major questions investors have to address when considering cryptocurrency purchase. 

Bitcoin is ‘Gold 2.0’: True or False? 

Launched in the midst of 2008 – 2009 financial crisis cryptocurrency was conceived as a peer-to-peer electronic cash system, where trusted third parties like banks and payment processors were no longer needed within the chain of transaction. A decade has passed and Bitcoin is no longer referred to as money, but rather called ‘digital gold’. This nickname was coined due to the fact that cryptocurrency acts as a ‘safe haven’ for investors during global financial markets turbulence phase. 

In an interview with Bloomberg, Michael Novogratz, the billionaire co-founder and chief executive officer of Galaxy Digital Holdings, and a well-recognized cryptocurrency proponent, defined Bitcoin as ‘digital gold’. “Bitcoin is a type of gold. We are referring to it as ‘digital gold’ and building market infrastructure to make trading smoother for wider customer audiences.” 

Advocates of the aforementioned concept highlight high price correlation between Bitcoin and gold. For instance, Norwegian cryptocurrency intelligence company Arcane Research published a study in mid-January 2020 covering four years in review. The research shows Bitcoin-gold correlation hit rock-high following the death of Iranian military commander General Soleimani and increased tensions between the U.S. and Iran thereafter. BNN Bloomberg research shows similar findings. According to the data available to analysts, the Bitcoin-gold correlation doubled between May and July 2019, shooting from 0.496 to 0.827. A correlation coefficient of 1 indicates that the assets move in perfect lockstep.

Opponents to the said concept note that Bitcoin shares some ‘safe haven’ properties with its gold counterpart, however warn against equating same and thus downplaying other crypto advantages. “Bitcoin is the most scarce asset that has ever been available to humans. Soon it will be the most valuable asset that has ever been available to humans,” conveys the famous YouTube influencer, crypto evangelist and co-founder of MMCrypto Chris Jaszczynski. “A recession and crisis are imminent due to cyclical nature of financial markets. The emergence of such a new and unique asset is likely to be beneficial in pulling through at minimal cost.” 

Yale University economists Yukun Liu and Oleg Tsyvinsky arrived at a conclusion that Bitcoin is a unique asset totally unrelated to traditional assets like stocks or gold. Their last publication highlights the fact that cryptocurrencies comprise an emerging asset class, which is radically different from traditional asset classes and is less exposed to external factors. “We established that the risk-return tradeoff of cryptocurrencies (Bitcoin, Ripple, and Ethereum) is distinct from those of stocks, currencies, and precious metals. Cryptocurrencies have no exposure to most common stock market and macroeconomic factors.” 

Bitcoin and investment portfolio

Building an investment portfolio starts with identifying investment goals, time frames and, most importantly, investor’s tolerance for risk. All investments involve some degree of risk, and there is no guarantee that when you withdraw your investment you will end up with more money than you originally put into it. 

An investor needs to understand his individual risk tolerance when constructing a portfolio. A higher risk investment has a higher potential for profit but also a potential for a greater loss. A lower risk investment can reduce the possibility of loss, however one shouldn’t expect significant return.  Diversifying investment among different asset classes and sectors helps to distribute these risks. Low correlation between Bitcoin and other asset classes aids perfectly to this end. 

“Bitcoin is another type of asset. It’s not stocks, bonds, or gold, and correlation between Bitcoin and traditional assets is low. Adding Bitcoin to investment portfolio improves risk diversification and aids as a portfolio risk hedge. In addition to that, having Bitcoin in your portfolio can increase total portfolio return quite significantly due to long term cryptocurrency market growth as observed over the past decade,” says banker, investor and Blockchain enthusiast Leonid Morozovsky. 

According to various estimates, a share of Bitcoin as a high-risk asset should not exceed 10% of investment portfolio. According to Lui and Tsyvinski of Yale University, Bitcoin should occupy around “6% of every portfolio”. 

The founder of Edelman Financial Engines Ric Edelman suggests keeping crypto share to 1% within an investment portfolio as the most secure level. A 1% allocation to Bitcoin just might be enough to give investors the benefit of diversification without risking the whole portfolio, Edelman said. 

“Because there’s a fixed number of Bitcoin, it’s inflation-proof,” said Edelman speaking at the TD Ameritrade LINC conference in Orlando, Florida. “We need to acknowledge that 1% allocation isn’t going to materially harm a client. It isn’t going to prevent them from achieving their financial goals, and won’t damage their personal finances,” he noted.

Bitcoin and “Dollar-Cost Averaging” 

There was this old trading joke. A newbie talking to a financial market guru asks: how hard can buying low and selling high be? In reality, even professionals struggle to predict twists and turns of the market, and determine whether an asset has hit rock-bottom price, or if it’s still well on the way to. More often than not, the reverse is true. Investors just follow suit, buy assets high and sell them at the wrong time, locking in losses rather than in profits.   

The Dollar-Cost Averaging (DCA) helps taking emotion out of investment. This strategy suggests purchasing your target asset at regular intervals and in equal portions, regardless of the market fluctuations. Thus an investor mitigates risks of purchasing assets at the wrong time (e.g. if the latter was at a high price and then broke).

Investors would have received a tenfold return in five years with as little as $100USD invested monthly in crypto. Moreover to that, the risks would have been evenly distributed in length of time. According to the Financial Industry Regulatory Authority (FINRA), the DCA strategy produces lower return compared to making a lump-sum investment at rock-bottom price. That said, however, it is the best fit for risk-averse investors eyeing long-term investment growth. 

“Bitcoin’s best advantage is that anyone can buy it. There’s no need to enter into contracts with brokers, and there are no entry thresholds. One can buy $20USD or $20 million USD worth of crypto all the same. Whereas present-day services allow Bitcoin purchasing in less than no time,” notes Itez payment solution CEO Vitaly Medvedev. “You won’t be able to purchase Apple stock or invest in public bonds at such ease.