Bitcoin is still a teenager. Initially, the largest cryptocurrency was widely viewed as a highly speculative asset most appropriate for risk-tolerant, short-term traders. Now, however, many see that it merits consideration in traditional portfolios.
The notion that bitcoin can be included in standard investment portfolios earned further ballast earlier this year when the Securities and Exchange Commission (SEC) approved spot bitcoin ETFs. Registered investment advisors (RIAs) and wealth management firms are among the adopters of those products. That’s confirmation professional asset allocators see merit in bitcoin and view it as an appropriate part of some client portfolios.
Increased advisor usage of bitcoin is a good segue into the merits of overall crypto inclusion in portfolios. Beyond bitcoin, ether, and a few other of the largest digital currencies, the crypto universe has many potentially overly risky, low use case coins. There are 10,077 digital tokens on the market today and the number of viable investment ideas from that group is likely measured in tenths of a percent.
Important Points About Bitcoin in Portfolios
Many people associate bitcoin with jaw-dropping declines and rallies. Some of that reputation could be shed as it matures. Still, the reality is that cryptocurrency isn’t for the faint of heart. Advisors and investors need to acknowledge as much prior to getting involved.
“So far, bitcoin has historically generated strong enough upside returns to make up for its losses. Ether, however, is still down from its peak in November 2021,” observed Morningstar analyst Amy Arnott. “It’s also worth noting that a large number of cryptocurrencies are essentially ‘dead,’ or worthless. Based on data from CoinMarketCap, there were more than 1,400 cryptocurrencies with no trading volume as of this writing, making it unlikely that investors would be able to realize any gains.”
Options for investors to access bitcoin and deployment within a portfolio have also increased. The aforementioned spot ETFs have broadened the landscape of products market participants have at their disposal. Equally important, many spot bitcoin ETFs have favorable fees or fee waivers that temporarily eliminate expense ratios.
Other ideas include the plethora of equity-based ETFs that feature rosters of stocks investors describe as “crypto-correlated.” While not perfect from a volatility standpoint, those ETFs may be more suitable for some investors than direct crypto ownership.
“Crypto investors can also find a variety of digital asset ETFs that invest in stocks of companies that are involved in the crypto ecosystem, such as crypto mining, mining equipment suppliers, and companies that develop and use blockchain and other digital asset technologies. So far, though, most of these crypto-related equity funds have been slightly more volatile than pure plays on bitcoin and/or ether,” concluded Arnott.
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