Why is Crypto Bullish and What is the Need of Having it in Your Portfolio?

• October 8, 2020 / admin

Even though the crypto-space has seen immense growth since 2009, the asset class is still considerably small and highly volatile. What makes investors skeptical is whether their portfolio should have Bitcoin or a similar cryptocurrency exposure? If at all Bitcoin is a bubble? When doing an online analysis of the same, you would find polarized views. Some would present cryptocurrencies as the most beneficial assets of the modern-era and others would ridicule it as worthless.

In reality, cryptocurrencies have spiked and crashed in value on several occasions since 2013. In the current environment, even though the crypto and blockchain technology is witnessing pains amidst the global economic outlook that is looking shaky due to resurgence of the novel coronavirus, investors remain bullish on the space in the long-term. Raoul Paul, the founder of Global Macro Investor, shifted 50% of his portfolio into Bitcoin. That is not all, Michael Saylor, the founder and CEO of business intelligence firm, MicroStrategy, doubled his bet on Bitcoin with a purchase of $175 million worth of Bitcoins on September 15. In his interview to CoinDesk, Saylor referred to bitcoin as ‘digital gold’. Earlier the company had bought $250 million worth of Bitcoins on August 11.

Overall, Bitcoin is up by 64% in 2020, and Ethereum, the Ethereum-based blockchain token, has tripled in value since the beginning of 2020. But why is crypto bullish even in such times?

Bitcoin has a limit of 21 million coins in total. The scarcity of such virtual currencies combined with trust in them is what drives their value. Satoshi Nakamoto designed the blockchain structure such that even if he wants he cannot add more coins to the set protocol. So, even though cryptocurrencies have found limited industrial uses so far, their scarcity, durability, portability, divisibility, verifiability, storage, saleability, and their identity across countries – is what makes them bullish and rising even in such dire times.

But is crypto becoming a safe-haven investment? And should it be included in the portfolio? Well, going by the traditional definition of safe-haven investments, cryptocurrencies are not safe heavens. They do not have an inherent perceived value like gold nor are they backed by a governing body or a company. But when you watch the performance of cryptocurrencies during the COVID-19 issue, it is evident that they have outperformed traditional stocks. These digital currencies rose in value by a substantial margin. As of 15 September 2020, the price of Bitcoin is approaching $10,747 per coin or Rs. 7,90,000. While that is still significantly lower than its zenith 2017 price of $20,000, the YTD percent increase still dwarfs returns on many equities. If you look at the returns of some of the smaller market-cap cryptocurrencies, returns are enviable. Hence, it could be said that cryptocurrencies per se have shown certain traits of a safe-haven investment.

That said, do cryptocurrencies merit a position in your portfolio? The answer is debatable to an extent. But having a defined exposure of cryptocurrencies in your portfolio is a good idea. As per experts, it is safe to invest 1 to 5% of your total portfolio value in cryptocurrencies like Bitcoin. In fact, as per a study conducted by a Yale economist and published by Bitcoinist, cryptocurrencies should inhabit about 6% of every portfolio for optimal construction. Even investors who are skeptical about the new-age currencies should maintain a minimum of 4% allocation, said the study.

However, the exact percentage depends on your risk tolerance and financial goals. Current records have shown retirees are also changing their investment portfolio to include a bit of crypto. Further validated by large venture firms like Andreesen Horowitz, which is gearing to invest $300 million in this space, cryptos for sure merit significant attention and analysis on several money managers’ part.