How should the role of bitcoin in a portfolio be thought about?
When we invest, we should do so by looking at the value of an asset and its role in our portfolio, not just its price
When it comes to investing, the most frustrating part is the incessant focus on the price rather than the quality, characteristics or possible uses of the asset. Investor psychology then almost always drives us to enter an asset when it is most volatile and expensive, historically worst time. As in life, in the world of investing we need a little common sense and organization. When we invest, we must do so by looking at the value of an asset and its role in our portfolio. A portfolio is like a jigsaw puzzle: each piece has a specific role to play, so it must be constructed carefully.
There is a lot of euphoria in the markets these days, both in equities and cryptocurrencies. There is a lot of talk about Bitcoin Benefit and the appetite that institutional funds are beginning to have. Two factions have formed among our clients: on one side are the Bitcoiners, those who would put all their capital into BTC; on the other are the skeptics, those who compare the asset to the Tulip bubble in Holland in the 1600s.
In this article I will explain how I view Bitcoin as an investor, its position in the portfolio, why I would never put all my savings in one asset, and why investing is a generational issue.
The generational issue
In families, talking about assets always leads to endless discussions: different generations see capital management in different ways. This is a fairly common feature, as each generation invests according to the times. Social and economic status strongly conditions our risk appetite.
For example, the Silent Generation, those born between 1928 and 1945, lived in a period of strong instability and therefore their interest was more in gold. The Baby Boomers on the other hand, those who saw one of the best demographic and economic booms in history, were avid buyers of stocks because they benefit in expansive periods. Generation X, the one after the Baby Boomers, on the other hand, arrived at a time when stock yields and returns were beginning to decline. Because of this, they had a strong interest in hedge funds and all those alternative structures that offered (or promised) above-market returns.
And this brings us to the latest generation. The one that entered the markets a few years ago: the Millennials. The greatest generation in history is living in a time when markets are at an all-time high. But the markets and the economy have then reached a gap never seen before: as the markets continue to rise, the economies worsen. This is the correlation between markets and GDP, which as you can clearly see has become negative.
This situation is driving Millennials more and more towards Bitcoin, the disrupting asset.
Have Institutional Funds sniffed it out?
Until a few years ago, the relationship between Institutional Investors and Bitcoin seemed almost impossible. In reality, the evolution seems to be in line with that of a new and unconventional asset: Institutional Investors, and here we are talking about the big money managers, need time before adopting an asset. They need to feel comfortable, or at least understand the risks and have a track record: Bitcoin today has achieved this track record, having more than 10 years. Also, it is important for an asset to go through at least one crisis to be considered as such, as investors always want to see how it performs during less rosy times.
Bitcoin was christened in March 2020: today, it is still alive and well, headed for even higher levels. That’s why Bitcoin has followed the steps that any other asset follows: it started with angel investors, or rather those investors who have more appetite for risk (like the Winklevoss brothers for example), many of whom have become billionaires thanks to cryptocurrency.
We then moved on to Michael Novogratz, the founder of the investment fund Galaxy Digital Holdings, who worked as a hedge fund manager at Fortress Investment Group and Goldman Sachs. That was followed by Barry Silbert, the founder of Grayscale Investments, which is the firm that manages the Bitcoin Investment Trust (GBTC), the first fund that actually gave Bitcoin access to the institutional world. In the U.S., Grayscale has become the portal that helps institutional funds diversify their portfolios and take exposure to Bitcoin. According to Morningstar, since the beginning of the year, GBTC’s price is up 189% and NAV is up 161%. These numbers show how much the appetite for Bitcoin by institutional funds is increasing.