Is Bitcoin An Alternative Investment?
Bitcoin can be a way for investors to gain diversification in their portfolio
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 can be an investment vehicle as well. Investors and speculators can find the dollar value of bitcoin on numerous exchanges with numerous real time tickers.
Although there are increasing numbers of investors who are using these exchanges to buy and sell bitcoin for profit, the potential for bitcoin as a widely used investment vehicle for the regular investor is 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 now on the OTCQX exchange under ticker symbol: GBTC. I’m actually an owner of shares in this from the time it was initially an investment trust open only to accredited investors. Now you can buy shares in it (as I have also done) through your own financial adviser for any of your accounts, including your retirement account.
One of the nice things about this investment is that it simply mirrors the price of bitcoin as the underlying value of each share of GBTC is worth a 10th of the current value of bitcoin.
So if bitcoin is trading at $300, the underlying value of one share of GBTC should be approximately $30. However, as with other similar investments, the bitcoin fund can trade higher or lower based upon investor interest and demand for the investment.
Bitcoin as an Alternative Investment
When I considered investing in this trust, I was doing so not only as a speculator investing in bitcoin, but as someone who was performing proper asset allocation on my investment accounts, and using bitcoin as an alternative investment.
The definition of alternative investments (according to Wikipedia) is as follows: “An alternative investment is an investment in asset classes other than stocks, bonds, and cash. Alternative investments are sometimes used as a way of reducing overall investment risk through diversification.”
One of the major reasons for using alternative investments is that they are known as “non correlated” investments, which means that their return is not correlated to that of stocks and bonds, making 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% - 10%) 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, they’ll most likely tell you that hedge funds, private equity, gold, currencies and real estate are the most favored forms of alternative investments.
They’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 of them in real time through the various tickers and online exchanges available now. Additionally, an investment vehicle like GBTC simply mirrors that value, making that transparency even easier.
Perhaps, they’re really not that alternative as people would think. As additional investment vehicles become available that package bitcoin into easily accessible instruments, we’ll find not only more investors but advisers as well, taking note of their ability to be utilized in an investor’s portfolio.
For now, it’s best to consider them as an alternative investment and not bet the ranch on them.
At least, not yet.