Whether you believe Bitcoin is inherently worthless or could eventually head for $650,000, there is little doubt that it has become an asset class of great interest to investors (though perhaps for different reasons than the financial world’s latest obsession: GameStop).
Last month a leading asset manager featured in Investors’ Chronicle magazine even recommended that a reader include a small allocation to the cryptocurrency as part of their retirement savings. Bloomberg Wealth has also written a couple of “how to” guides on Bitcoininvesting.
New Crypto Heights
Bitcoin’s price over the last five years, as of Jan. 29
Source: Bloomberg
.chart-js display: none;
But if Bitcoin really has gone mainstream, what does that mean for your personal finances and investments?
On the face of it, Bitcoin is neither intrinsically valuable, nor is it a reliable store of wealth. It certainly does not produce an income. It does, however, possess two characteristics that could make it a good fit for even the most conservative portfolio.
The first is its volatility. Many view Bitcoin’s volatility with horror. Indeed, the U.K.’s Financial Conduct Authority has repeatedly warned investors off cryptocurrencies for precisely that reason. Between Dec. 2017 and Dec. 2018 the price of Bitcoin fell by almost 85%. But since that nadir it has risen more than tenfold, demonstrating that volatility can cut both ways. The greater an investment’s volatility, the larger the losses but the larger the potential returns.
If I had invested one percent of my retirement savings in a company in the FTSE 100 a year ago, I would pretty much have been wasting my time. My investment would have been too small to add much upside, even had the stock risen 20% or 30%. Indeed, the FTSE actually fell last year. However, had the worst happened and the company declared bankruptcy, I would have only had one percent at stake.
Bitcoin’s volatility offers a greater possibility of meaningful gains, while still only committing the same small, manageable sum. Over the past year, its price has more than quadrupled. Had I invested the same one percent of my retirement (full disclosure: I don’t currently hold any Bitcoin), it would have contributed much more to my portfolio. Thanks to Bitcoin’s volatility, as long as you don’t bet the ranch, there is still the possibility of making a real gain without too much loss.
Its other key characteristic is that it is not a leveraged investment. Unlike the foreign exchange trading programs, which allow inexperienced investors to apply large leverage to trading currencies, your losses with Bitcoin are limited to your initial stake. Most other get-rich-quick schemes, including contract for differences or CFDs, rely on debt to some degree.
With leveraged investments you lose borrowed money almost the instant your investment falls in value. With Bitcoin you generally stand, at worst, to only lose your initial stake — unless, of course, you’ve borrowed to trade in the cryptocurrency too.
It was a relative absence of leverage that was the difference between the bursting of the dot-com bubble in 2001, which resulted in a mild recession, and the 2008 financial crisis, which almost wiped out the entire banking sector. Although some debt was involved in 2001, most of the losses were made by “real money” investors. During the 2008 crisis, many banks and professional investors were unable to refinance the borrowing behind supposedly safe AAA assets, forcing them to sell those assets to avoid escalating losses.
Where investments are unleveraged you live to fight another day after even the most severe losses. For example, people often bemoan missing out on buying shares in tech giants such as Amazon.com Inc. when they were at bargain basement prices. At the turn of the century, Amazon’s share price was $113. Today those same shares are worth more than $3,300 apiece.
But what is commonly forgotten is that between 2000 and October 2001, you would have lost 95% of your money as the price plummeted to $5.51. Only by continuing to hold through the dot-com downturn and to now would you have reaped your 2,740% reward. And you wouldn’t have been able to do that had you held shares using leverage.
Of course, routinely losing 95% of your initial stake is not a sustainable investment strategy. Nor is Bitcoin for everyone, as underlined by its $10,000 fall since Jan. 8. Most financial advisers are certainly far from keen.
But to point out, as some are doing, that crypto assets are unlikely to be able to access protection like the U.K.’s Financial Services Compensation Scheme — which pays consumers in the event of a financial services firm going under — is something of a red herring. You wouldn’t have that protection if you invest in any FTSE 100-listed company or GameStop and either fail.
So, if you have a couple of pounds that you can afford to lose, there are probably worse things to buy right now than the world’s most popular cryptocurrency.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
