Does Bitcoin have a place in every investment portfolio? – National

Some investors have long believed that everyone should allocate some of their portfolios to gold or other commodities. Gold, the argument goes, helps protect your investments from inflation and stock market declines.

Now some are arguing the same thing about Bitcoin.

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“My personal belief is allocating to Bitcoin is a logical approach and should have a role in everyone’s portfolio, just as many people think gold or commodities should, as a diversifier,” Meltem Demirors, chief strategy officer at the cryptocurrency investment company CoinShares, in a recent Streetwise Barron podcast.

But to what extent is the world’s most popular cryptocurrency comparable to the world’s best-known safe haven asset – and do investors really need gold in their portfolios, anyway?

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Bitcoin: a bit like gold but with ‘huge volatility’

The economic downturn triggered by the COVID-19 pandemic has rekindled inflation fears among some investors.

Many central banks, including the US Federal Reserve and the Bank of Canada, have been increasing the amount of money in circulation in their countries as a way to stimulate economic activity. The playbook is similar to the same central banks that turned out during the 2007-08 global financial crisis.

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And now, as back then, some fear that this kind of monetary policy will eventually lead to inflation.

“The usual idea is that the money supply increases, then people just have more money in their hands and prices go up,” said Andreas Park, associate professor of finance at the University of Toronto.

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That is, consumers flush with cash can offer prices, causing inflation.


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Park does not believe that fears of rampant inflation are justified. Economies like the United States and Canada have not seen high inflation since the 1980s, he notes.

Currently, the annual inflation rate is 1.4 percent in the US and 0.7 percent in Canada, well below the two central banks target of around two percent.

But investors worried about inflation often look to gold as a way to hedge against it. While central banks can dial the amount of money in circulation, there is only a small amount of gold available in the world.

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“You have to mine it if you want to add to it,” said Park. “It can’t be magnified.”

The same is true of Bitcoin.

The digital token, which was intended to be an alternative to inflation national currency, was designed to have a maximum cap of 21 million coins. New coins are being created as a prize only for “miner,” users who employ computer power to record and authenticate crypto transactions.

To date, about 88 percent of bitcoins have been mined.

And as with gold, there isn’t much use in the real world for Bitcoin, Park said. You can use gold to make jewelry, for electronics, or as a collectible. And you can use Bitcoin to pay for some goods and services if you find a vendor willing to accept crypto. For the most part, gold and Bitcoin are only worth what buyers are willing to pay for them.


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Some people also buy Bitcoin, like gold, as an investment that won’t be correlated with stock market performance, said Robb Engen, financial planner and author of the popular personal finance blog Boomer and Echo.

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Gold is commonly touted as a safe haven asset, an investment that will retain or increase in value in times of market turbulence.

But as an inflation hedge and as a safe haven investment, Bitcoin comes with “huge volatility,” Park warns.

While gold itself is volatile, Bitcoin’s rise and decline is dwarfing the price swings of the precious metal, Park said.

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On Friday, Bitcoin was trading at around US $ 32,000 ($ 40,700), more than 20 percent lower than an all-time high of US $ 42,000 ($ 53,500) and struck two weeks ago, losing ground amid growing concerns it is one of a number of price bubbles and as cryptocurrencies catch the attention of regulators.

Traders also blamed the sale on a report posted to Twitter by BitMEX Research suggesting that part of bitcoin could have been spent twice, even if concerns were later resolved.

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The downside still leaves the cryptocurrency some 700 percent higher than its 2020 low of US $ 3,850 ($ 4,900) hit in March. Large investors have driven the lightweight rally in part, with several Wall Street firms moving in the crypto space.

JP Morgan Chase, for example, has created and tested its own digital ticket, JPM Coin, despite the fact that CEO Jamie Dimon has been a vocal critic of Bitcoin in the past. The investment banking giant has also started offering banking services to two well-known crypto exchanges, Coinbase and Gemini Trust.

And Paypal announced in October that it would enable U.S. account holders to buy, hold and sell cryptocurrency. CME Group and Fidelity Investments Inc.’s derivatives market also offers services that allow for the purchase and sale of crypto assets.


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Put a bet on Bitcoin

Engen sees gold and Bitcoin as speculative investments. Investing in cryptocurrency may also be a way of exposure to technology in its early days.

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As with pre-legalized cannabis stocks and the dot-com boom of the late 1990s, investors can make big profits by pouring money into a new industry in its infancy, he said. But with that comes the risk of steep losses when the boom goes bust, he warns.

“By all means, you could use five percent of your portfolio to make a bet,” said Engen. “But you have to go into it with your eyes open.”

You could lose most of your investment, he warns.

If you want to tabulate speculative investments, you need to start with some clear ground rules and stick to them. For example, committing to have no more than five percent of your investments tied up in crypto-volatile assets suggests that if you surge in value, you have to sell many of your holdings n means they would take a larger share of your portfolio, Engen notes.

But it can be difficult to get yourself to sell investments that saw skyrocketing growth, he adds.

Early success with speculative assets may lead you to believe “you are good at this,” when, in fact, it was just luck, he said.

With files from Reuters

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