Should Investors Consider Adding Bitcoins To Their Portfolio?

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We are in the midst of a financial revolution, featuring technological disruptions from the likes of bitcoin. The digital currency is seven years old now and in this short time-frame, it has been scrutinized, discussed, promoted, banned, checked, raided, accepted, traded, and much more. Given its volatile price movement, should you consider adding bitcoins to your portfolio? Perhaps.

All investors have to consider risk; so where does bitcoin fall on the risk/reward scale? Barry Silbert, during a MarketWatch Investing Insights event in 2014 said, “It is pretty much the highest-risk, highest-return investment that you can possibly make.”

While most people are dissuaded from buying bitcoins - given the vigilant regulatory eye on digital currencies and the wild swings it displays – bitcoins has some virtues which may be appealing to some investors. There is a preset cap on the maximum number of bitcoins which can come into circulation, thus the scarcity factor attached to bitcoins adds value to it, much like gold.

Bitcoins can be easily bought or sold on an exchange; they can alternatively be used as a medium of payment. Since bitcoins are out of the normal financial and economic system, they provide a way out of any impending economic or banking crisis, which would affect the regular portfolio of an investor. In the US, the Internal Revenue Service (IRS) treats virtual currencies like bitcoins as property for tax purposes.

Some industry-wide steps are making things around bitcoins more structured. In May 2015, the New York Stock Exchange (NYSE) launched a bitcoin index, the NYXBT with the aim to provide bitcoins’ value a global benchmark. Then there is the Bitcoin Investment Trust which “enables investors to gain exposure to the price movement of bitcoin through a traditional investment vehicle, without the challenges of buying, storing, and safekeeping bitcoins.” BIT’s shares are the first publicly quoted (OTCQX) securities “solely invested in and deriving value from the price of bitcoin.” This provides a chance to even institutions to take exposure to the virtual currency.

Additionally, bitcoins companies have also been attracting huge funding, a bit of the money is said to be kept aside under defense funds.

Final Word

There is no escaping the risks that an investor gets exposed to while investing in bitcoins. But dedicating a nominal amount from your portfolio may not be a bad idea, maybe 0.5% - 1% depending on your resources and enthusiasm. It particularly makes sense for a young investor who can not only set aside a small amount, but also digest the sharp swings in its price. If you do plan to give it a try, have a clear exit plan. Cash out a small amount on a decent profit and invest back when there is opportunity. It would add not just diversification, but a new dimension to your portfolio.

  • This slideshow takes a look at Bitcoin and its short history, as well as 

a few other virtual currencies that have left their marks in the world. Shutterstock photo.
  • Bitcoin was <a href='http://www.newyorker.com/magazine/2011/10/10/the-crypto-

currency' target='_blank'>invented in 2008 by Satoshi Nakamoto</a>. It was released as open-source software in 2009. 

Nakamoto, who claimed to be a  36-year old Japanese man, said he created bitcoin in response to the financial crisis at the 

time. Shutterstock photo.
  • Bitcoin is a virtual currency (technically a cryptocurrency), and there are 

21 million bitcoins which can be mined. As of August 2015, about 14,500,000 bitcoins have been mined. iStock photo.
  • A cryptocurrency is <a href='http://www.coindesk.com/bitcoin-digital-

currency-virtual-one/' target='_blank'>based on the principles of cryptography</a> - namely, based on a peer-to-peer 

network. Most currency in the world can be held digitally (like gift cards); currency that's virtual, like bitcoin, exist only 

on the internet. Some financial analysts consider bitcoin a commodity. Shutterstock photo.
  •  At first, a single bitcoin was worth less than a penny; as of August 2015, a single 

bitcoin is worth about 215 U.S. dollars. Shutterstock photo.
  • He announced in April 2011 that he was moving on from bitcoin, leaving that 

life behind. A highly controversial 2014 Newsweek article claimed to have identified Nakamoto, but the bitcoin creator came 

out of hibernation to <a href='http://www.cnbc.com/2014/03/07/real-bitcoin-creator-i-am-not-dorian-nakamoto.html' 

target='_blank'>say that he was not the person identified</a> in the Newsweek article. Newsweek Magazine cover.
  • The blockchain is the heart of bitcoin. It's a public ledger that records all bitcoin 

transactions, open to all users. And it's incredibly secure, making tampering very difficult. The blockchain has drawn the 

interest of many financial companies. Even <a href='http://www.bloomberg.com/news/articles/2015-07-23/nasdaq-expects-to-

be-first-exchange-to-use-bitcoin-technology' target='_blank'>Nasdaq is planning to incorporate blockchain 

technology</a>. Shutterstock photo.
  • Bitcoin has faced its share of controversies. Due to anonymity, people can use bitcoin to 

fund illicit activities (see: <a href='http://www.bloomberg.com/news/articles/2013-10-03/fbi-snags-silk-road-boss-with-

own-methods' target='_blank'>Silk Road</a>). Another major dustup occured during the <a 

href='https://www.nasdaq.com/article/a-480-million-mystery-the-saga-of-mt-gox-cm507054' target='_blank'>$480 million 

collapse of Mt. Gox</a>. Shutterstock photo.
  • However, bitcoin is becoming widely accepted, with retailers like Microsoft and Baidu 

accepting bitcoins. It is by far the most well-known digital currency, but not the only one. Shutterstock photo.
  • It was launched in 1996, and was the <a href='http://www.wired.com/2009/06/e-gold/' 

target='_blank'>first digitial currency to get widepsread usage</a>. It let people open accounts based on the value 

of gold, but was ultimately shut down by the U.S. Federal government after its founder pleaded guilty to money laundering-

related crimes, and running an unlicensed money transmitting service. Shutterstock photo.
  • In 2007, <a href='http://www.bankingtech.com/196932/virtual-currency-ven-takes-on-bitcoin/' 

target='_blank'>Ven was launched</a>. It is now seen as an alternative to bitcoin, based on currencies, commodities, 

and carbon futures, making it an environmentally conscious currency. It is listed on the London FX trading venue LMAX 

Exchange. Shutterstock photo.
  • Originally conceived as a joke, it became popular very quickly, reaching a capitalization of 

$60 million by January 2014. (The meme was based on an image of a Shiba Inu dog. <a 

href='http://knowyourmeme.com/memes/doge' target='_blank'>Read more about that here</a>) One year later, that number 

has fallen to $13.5 million. <a href='http://motherboard.vice.com/read/talladega-shibe-josh-wises-highlights-in-the-

dogecar' target='_blank'>Its most notable moment came when the community sponsored a NASCAR racer</a>, which led to 

the Dogecoin car being featured at several high-profile races.
  • This digital currency, along with DopeCoin hopes to make it <a 


problems/' target='_blank'>easier for marijuana businesses to process money</a>. PotCoin focuses on the legalized 

marijuana industry. Shutterstock photo.
  • As mentioned earlier, bitcoin's blockchain technology has drawn a lot of interest, even to 

the point where some are saying that the <a href='http://www.forbes.com/sites/gregoryferenstein/2015/07/29/former-obama-

tech-advisor-explains-how-bitcoin-could-transform-government-in-5-quotes/' target='_blank'>blockchain is actually more 

important than bitcoin itself</a>. Shutterstock photo.
  • But digital currency has the potential to <a 

href='https://www.nasdaq.com/article/bitcoin-and-remittances-can-it-work-cm504136' target='_blank'>become much more 

democratic</a>, with the rise of crowdfunding and microlending taking the place of more traditional bank loans. New 

payment systems like Paypal and Apple Pay are making it easier for people to spend money online. And currencies like bitcoin 

could be used by those who live in emerging markets to save money while making exchanges, or even store value in a more stable 

currency rather than inflationary fiat currency. Shutterstock photo.
  • Regulation of bitcoin, however, remains a contentious issue. Bitcoin 

adherents don't believe in regulation - after all, that was why bitcoin was made in the first place, they argue. But others 

see that bitcoin's growth and ultimate mainstream adoption requires some regulation. <a 

href='http://fortune.com/2015/04/23/theres-big-pressure-on-new-yorks-bitcoin-regulation-plan/' target='_blank'>New York was 

the first state to roll out a policy</a>, but more could be coming soon. Shutterstock photo.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: News Headlines , Bitcoin , Investing Ideas , Technology

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