Should You Consider Bitcoin for Your Investment Portfolio?
The Growth of Bitcoin Has Created Investment Opportunities
Bitcoin hit the $400 price in November 2015 — something it hadn’t done in a year. Word of bitcoin was reaching the more mainstream financial publications at that time. An article from Bloomberg reported on this price increase in positive terms rarely seen from a leading mainstream financial publication. It stated, "Bitcoin is on a roll. Earlier this week we pointed out that the virtual currency was on a massive winning streak.
It's up nearly 40 percent in the last three days."
The Bloomberg article noted that analyst Gil Luria of Wedbush Securities wrote the following to clients earlier in 2014: “We believe bitcoin and its associated blockchain technology have the potential to disrupt the existing financial infrastructure over the next few years. We believe the value of the bitcoin currency (BTC) will benefit from this trend and therefore are initiating coverage of GBTC with an OUTPERFORM rating and $40 price target."
At the same time in November of 2015, Paul Vigna of The Wall Street Journal wrote in his column, "The price of bitcoin is surging, crossing back over the $400 mark for the first time since last November, amid a burst of trading activity and a surge in interest in the technology underlying the cryptocurrency.”
Then bitcoin hit a very volatile period as a recent hack of a bitcoin exchange drove prices down. This is indicative of the asset, which is clearly not for the meek and conservative. But is it even something that an investor should consider?
Can You Make Money With Bitcoin?
Bitcoin is most commonly referred to as a “digital currency.” It’s not a physical instrument, but just as physical instruments such as dollars and coins can be used, it can function in its digital form as a currency to pay for purchases.
Granted, there may not be many retail shops that actually accept bitcoin, but the list is growing. It includes Overstock.com, Dell, Microsoft, Reeds Jewelers and even the Sacramento Kings. You can even use a Visa credit card that can be used to charge purchases that are automatically debited from a consumer’s bitcoin wallet.
When you classify bitcoin as a currency and compare it to other currency investment options such as the U.S. dollar or yen, the reality is that bitcoin was the world's best-performing currency in 2010, 2011, 2102, 2013 and 2015.
What happened in 2014? It was the worst performing currency! This further shows the volatility of bitcoin.
Bitcoin as an Alternative Investment
Because the value of bitcoin can be denominated in a dollar value and can fluctuate up or down based on market conditions, it’s not only a form of currency but it can be viewed as an investment vehicle as well. I used to tell people not to invest in anything if you couldn’t find its price in either a newspaper or through an exchange. The reality is that bitcoin is traded on exchanges throughout the world on a 24-hour basis. You’ll always know the value of bitcoin in dollars or your local currency.
But before you jump in and buy bitcoin or consider it as an investment, it’s important to recognize that bitcoin or any investment should be part of a financial strategy or plan that's based on your current situation, as well as your goals, objectives and prudent asset allocation strategies.
Bitcoin truly can’t be construed as a stock or a bond. A recent white paper by Chris Burniske of ARK Investment Management and Adam White of Coinbase firmly and eloquently lays down the gauntlet: It's time for investors to view bitcoin and other cryptocurrencies as their own asset class to consider for one’s investment portfolio.
Although I think that their views are compelling and will probably be proven correct in the very near future, I recommend that at this point you should view bitcoin as an alternative investment and fit it as such into that sleeve of your investment portfolio.
An alternative investment is in an asset class other than stocks, bonds or cash. They can be used to reduce overall investment risk through diversification.
One of the major reasons for using alternative investments is that they're “non-correlated,” which means that their return is not correlated to that of stocks and bonds. This makes them a great form of diversification in an overall portfolio that is primarily invested in those instruments.
For years, investment firms and professionals have advocated the need to include a small percentage of high risk and potentially high reward assets into your retirement portfolio. The thinking is that including a small percentage of your overall asset allocation (from 5 to 10 percent) into these assets can provide high potential returns with only a small impact on your portfolio if the risk becomes too great.
If you talk to an investment professional, he’ll most likely tell you that hedge funds, private equity, gold, currencies and real estate are the most favored forms of alternative investments. He'll also warn you that it may be difficult to determine the current market value of the underlying investment. That’s surely true with most hedge funds and private equities, but with bitcoin, you can see the price in real time through the various tickers and online exchanges now available.
How Can I Invest in Bitcoin?
The easiest and most direct way to buy bitcoin is through tools like Coinbase or Lawnmower. Coinbase is one of the most established exchanges — it’s been well funded by investors such as the NYSE. You can simply create a wallet there and buy either bitcoin or ether (ethereum).
Lawnmower is a slick new mobile app that allows for recurring buys of bitcoin and even provides analyst-level research and enhanced performance data on not only bitcoin but all the major cryptocurrencies, including ethereum, dash and ripple. It works in conjunction with Coinbase (your wallet is actually held at Coinbase) and it also has its own tracking index of the top cryptocurrencies, called the Lawnmower Blockchain Index.
Although increasing numbers of investors are using these accounts and exchanges to buy and sell bitcoin for profit, the potential for bitcoin as a widely used investment vehicle for the regular investor can be seen in the variety of other investment vehicles that are packaging bitcoin into these investments.
One of the first and now widely-held is the Bitcoin Investment Trust, which trades on the OTCQX exchange under ticker symbol GBTC. I’m actually an owner of shares, beginning when it was initially an investment trust open only to accredited investors. Now you can buy shares in it through your own financial adviser for any of your accounts, including your retirement account. Go ahead and ask your financial advisor if he's aware of it and what his thoughts on it.
One of the nice things about this investment is that it simply mirrors the price of bitcoin. The underlying value of each share of GBTC is worth 1/10 of the current value of bitcoin. If bitcoin is trading at $300, the underlying value of one share of GBTC should be approximately $30. As with other similar investments, however, the bitcoin fund can trade higher or lower based on investor interest and demand for the investment. It has traded significantly higher than its underlying value at times — a sign that investors are either hungry for any type of bitcoin investment or that it's truly overpriced. It has come down to earth after these spikes and is often closer to the underlying value of bitcoin, but be forewarned about its wide price swings.
Invest in Blockchain Technology
If you’re skeptical about a direct investment into bitcoin or cryptocurrencies but you still believe that the efficiencies and potential of blockchain technology — the underlying infrastructure of bitcoin — can have a major impact on businesses, you may want to consider sticking to investing in the stocks of companies involved in evaluating and integrating blockchain technology into their businesses. There are quite a few and many of them are high cap, blue chip companies.
One of the most visible groups looking at blockchain technology is the R3 Consortium, which began with nine investment banks actively examining how the technology could help their systems and the overall banking infrastructure. This group included JP Morgan Chase, Goldman Sachs, Credit Suisse, State Street, UBS, Commonwealth Bank of Australia, BBVA, Barclays and Royal Bank of Scotland. It has since grown to over 40 banks and although they have “closed” membership for banks, they are now looking for non-banking partners.
IBM is one of the largest companies that is aggressively pursuing blockchain technology. Seen as an “old guard” technology company, IBM gave their support to blockchain technology with a major release of their framework for securely operating blockchain networks.
IBM is not only recognizing that blockchain technology holds huge potential for businesses, but they've also realized that many businesses are concerned about the security implication of the technology. IBM's announcement focuses on the creation of a framework that provides “tamper-proof, trusted blockchain networks” with their cloud services.
Factom, a blockchain startup out of Austin, Texas, is also partnering with IBM on their beta release of IBM’s “Blockchain on Bluemix.” This allows for integration with Linux-based code to support multiple industries and diverse use cases. Factom is focused on providing blockchain solutions and capabilities that are already addressing contracts and even notary services.
IBM’s announcement may influence other companies to recognize the power of the blockchain and its function as a technology enabler for more system efficiencies and capabilities than their existing systems.
So for those investors who are paying attention to the talk of potential disruptions that bitcoin and blockchain will cause for businesses and our financial systems, there are actually numerous ways you can become involved as an investor. As additional investment vehicles become available that package bitcoin into easily accessible instruments, we’ll find not only more investors but financial advisers as well taking note of their ability to be considered and utilized in an investor’s portfolio.
For now, it’s best to consider an investment into bitcoin, cryptocurrencies and blockchain technology for an alternative investment sleeve within your portfolio. Don't bet the ranch on them — at least not yet. If past performance is any indication, owning bitcoin will be a bumpy road, but the potential for gains seems to be there given the changes to our financial system that bitcoin and other cryptocurrencies are bringing.
DISCLOSURE: After using Lawnmower, I became an investor and advisor to the company.