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.
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.