How should the role of Bitcoin be thought of in a portfolio?
When we invest, we must do so by looking at the value of an asset and its role in our portfolio, not just its price.
When it comes to investments, the most frustrating part is the relentless focus on price rather than the quality, characteristics or possible uses of the asset. The psychology of the investor then almost always pushes us to enter an asset when it is more volatile and expensive, historically the worst time. As in life, also in the Crypto Genius investment world it takes a little common sense and organisation. When we invest, we must do so by looking at the value of an asset and its role in our portfolio. A portfolio is like a puzzle: each piece has a precise role and must therefore be built with care.
There is a lot of euphoria in the markets at this time, both in the stock markets and in the cryptocurrency markets. There is a lot of talk about Bitcoin and the appetite that institutional funds are beginning to have. Two factions have emerged among our clients: on the one hand the Bitcoiners, those who would put all their capital into BTC; on the other hand the skeptics, those who compare the asset to the Tulip bubble in the Netherlands in 1600.
In this article I will explain how I see Bitcoin as an investor, its position in the portfolio, why I would never put all my savings in one asset, and why investing is a generational issue.
The generational question
In the family, talking about assets always leads to endless discussions: different generations see capital management in different ways. This is a fairly common feature, as each generation invests according to the times they are running. The social and economic state strongly influences our propensity to take risks.
For example the Silent Generation, the one born between 1928 and 1945, lived in a period of strong instability and for this reason their interest was more in gold. The Baby Boomers, on the other hand, those who saw one of the best demographic and economic booms in history, were greedy stock buyers because they benefited in expansive periods. Generation X, the generation after the Baby Boomers, came at a time when yields and stock returns were starting to fall. For this reason, they had a strong interest in hedge funds and all those alternative structures that offered (or promised) returns above the market.
And this brings us to the latest generation. The one that has been entering the markets for some years: the Millennials. The largest generation in history is living in a time when markets are at an all-time high. But the markets and the economy have then reached a gap never seen before: while the markets continue to rise, the economies are getting worse. This is the correlation between markets and GDP, which as you can see has become negative.
This situation is pushing Millennials increasingly towards Bitcoin, the disrupting asset.
Have the Institutional Funds sniffed it out?
Until a few years ago the relationship between Institutional Investors and Bitcoin seemed almost impossible. In reality the evolution seems to be in line with that of a new and unconventional asset: Institutional Investors, and here we are talking about big money managers, need time before adopting an asset. They need to feel comfortable, or at least understand the risks and have a track record: Bitcoin today has reached this track record, being more than 10 years old. It is also important that an asset, in order to be considered as such, goes through at least one crisis, as investors always want to see how it behaves during less rosy periods.
Bitcoin was baptized in March 2020: today it is still alive and well, heading towards even higher levels. That’s why Bitcoin has followed the steps that follow any other asset: it started with angel investors, or rather those investors who have more appetite for risk (like the Winklevoss brothers for example), many of whom have become billionaires thanks to cryptocurrency.
We then moved on to Michael Novogratz, the founder of the investment fund Galaxy Digital Holdings, who worked as hedge fund manager at Fortress Investment Group and Goldman Sachs. He followed Barry Silbert, the founder of Grayscale Investments, the company that manages the Bitcoin Investment Trust (GBTC), the first fund to actually give Bitcoin access to the institutional world. In the United States, Grayscale has become the portal that helps institutional funds diversify their portfolios and gain exposure to Bitcoin. According to Morningstar, since the beginning of the year the price of GBTC has grown 189%, while the NAV is 161%. These numbers show how much institutional funds are increasing their appetite for Bitcoin.