Bitcoin is making headlines, as the regulators have finally approved a way to “invest” that doesn’t require a crypto wallet, an unregulated “exchange” intermediary, and a “crypto key” that might be easily lost or stolen. In short, Bitcoin has joined the league of major asset classes now that Bitcoin Exchange Traded Funds (ETFs) will be available to the general public through stellar names like Fidelity, Invesco, Wisdom Tree, and more.
These ETFs will trade based on the “spot” (immediate) price of Bitcoin. Notably, Bitcoin futures have been trading on the CME Group platform since 2017 since December, 2017. (Full disclosure: I serve on the Board of Directors of CME Group.)
Securities regulators delayed implementing actual “cash” price trading on regulated securities exchanges in an effort to protect investors. In hindsight, the many and well-publicized issues with “Bitcoin exchanges” validated their concerns.
But now the time has come for regulated, public trading of Bitcoin. So, for my readers, the big question is: Does Bitcoin belong in your portfolio?
And the simple answer is that it depends on who you are, and how you view your own risk tolerance. Are you an investor, a speculator, a gambler? Are you looking for thrills, or trading profits, or long-term gains? Do you even understand what Bitcoin is, or does, or can do in the future?
The Attraction of Bitcoin
When I first wrote about Bitcoin several years ago (“Bitcoin Basics”) I explained that this was a form of electronic currency, similar to alternatives to paper money that have been used throughout the centuries.
Paper money was always easy to create, eventually diminishing the value of the currency. In ancient times, Roman emperors made ridges on the edges of gold and silver coins, to keep holders from shaving off the edges. In fact, historically gold has always been the best hedge against debasement of the currency (inflation). The simple fact is that gold cannot be created or destroyed, despite centuries of efforts by alchemists.
Supporters view Bitcoin as the “modern gold” because of its limited availability. According to a recent article on Investopedia, the total number of bitcoins that can ever exist is 21 million. As of December 18, 2023, there were 19,573,975 bitcoins in existence. This means that there are 1,426,025 bitcoins left to be “mined”.
Not only is the supply limited but like gold, the bitcoin itself cannot be changed because of the blockchain technology used to create it. (And I’ll let you delve deeper into this process on your own.)
But with a limited supply of Bitcoins, and now more access to trading/investing in it, the price has shot up dramatically in recent weeks. It is still below its all-time high of high of about $69,000 during the peak of the crypto rally in Nov. 2021 but well above its lows of around $16,000 at end of 2022.
Bitcoin in Your Portfolio
The headline prices and coming advertisements for owning Bitcoin are sure to make you wonder whether you should be a buyer now, or wait until the price maybe drops, or get in an out for a quick trade. You can be sure that your broker or advisor will be making suggestions, now that the access to Bitcoin pricing is more secure and regulated – and now that these purchases create commissions!
Before taking action, you must understand your own emotional risk tolerance. Are you ready to accept the volatility – and potential losses as Bitcoin prices fluctuate based on emotions of traders? After all, Bitcoin is just a commodity, with no intrinsic use. Even gold has actual uses in jewelry and in industry.
Prices of commodities fluctuate based on supply and demand realities – the impact of weather on agricultural commodities, the impact of central banks on interest rates, the impact of government policies on the value of a currency. But Bitcoin has no such basic commodity determinants; it is purely a speculation.
If you’re a speculator or gambler, Bitcoin will likely be the focal point of a lot of attention in coming years – a great place to get some “action”. That volatility will attract traders who seek volatility, timing their moves in a disciplined manner.
But if you’re a long-term investor, creating a retirement fund that will carry you through your final years, please limit your exposure to just enough to give you something to talk about at parties. It is very unlikely that Bitcoin – or any cryptocurrency – will replace the dollar in your lifetime. It’s pure speculation. And that’s The Savage Truth.