Bitcoin: A Universal Store of Value for the Digital Age
Lead Research Analyst Gabe Selby, CFA, explores how Bitcoin functions as a decentralized digital asset, its potential as a portfolio diversifier, and the investment case for adding Bitcoin to portfolios.
Bitcoin is a revolutionary form of digital currency first proposed in 2008 by a person or group of people known as Satoshi Nakamoto. Unlike traditional currencies, Bitcoin is a digital asset, and does not depend on central banks or governments. Instead, it operates as a completely decentralized system and stores activity on a digital database called the Bitcoin ledger. This decentralization means that no single company or government can make decisions about how the currency works or how people can use it.
Since its inception, Bitcoin has exploded onto the financial scene as a groundbreaking new form of digital collateral. As the first ever cryptocurrency, Bitcoin represents a monumental shift in how we conceptualize and transfer value in the digital age. In this paper, we will explain what makes Bitcoin so revolutionary and why it may deserve a place in your investment portfolio.
The Case for Adding Bitcoin to your Investment Portfolio
Although volatile on a standalone basis, even small 1-5% Bitcoin allocations have boosted portfolio returns while only marginally adding to long-term risk. Historical data showing Bitcoin's effects on portfolio performance presents a strong case that it warrants investment consideration. For example, our study found that a 3% Bitcoin allocation over the past 5 years would have increased the Sharpe Ratio of a traditional 60/40 portfolio from 0.60 to 0.75, or a 25% boost in risk-adjusted returns from a small tactical Bitcoin position.
Major benefits of Bitcoin in a portfolio context include:
Diversification - Bitcoin's returns have exhibited low correlations with traditional assets.
Asymmetric return profile - Small allocations have had an outsized impact.
Inflation hedge - Due to its fixed supply, Bitcoin is engineered to maintain its purchasing power over time.
Network effects - Bitcoin's growing network of users continues to enhance liquidity, acceptance, and network security.
The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell any of the underlying instruments cited including but not limited to cryptoassets, financial instruments or any instruments that reference any index provided by CF Benchmarks Ltd. This communication is not intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. Please contact your financial adviser or professional before making an investment decision.
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