Does Bitcoin deserve a place in your portfolio?
Long-term returns from equities are based on companies’ expected future earnings, but cryptocurrencies are not such an investment
LAUNCHED on Jan 9, 2009, by Satoshi Nakamoto – presumed to be a pseudonym for a person or group of people – Bitcoin became the world’s first cryptocurrency. When it was first issued, its price was next to zero.
If you had invested in Bitcoin sometime in January 2011 and held it till Dec 31, 2024, your return on investment would have been a whopping 165 per cent a year, provided your heart could withstand the rollercoaster ride and you stayed invested.
While the price has skyrocketed, its trajectory has been extremely volatile.
From the accompanying chart, you will notice a few spikes and crashes, all within a matter of months.
But the chart does not do justice in showing Bitcoin’s volatility, so I tabled some of the booms and busts in the past 15 years:
- From Feb 10 to Jun 9, 2011, Bitcoin rose by about 2,616 per cent
- From Jun 9 to Dec 31, 2011, the cryptocurrency fell by about 86 per cent
- From Dec 31, 2020 to Apr 13, 2021, it rose by about 119 per cent
- About three months later on Jul 20, 2021, Bitcoin fell by 53 per cent, back to the same level seven months ago.
Sometime in the second half of 2021, a client asked me whether we will include cryptocurrency in our portfolio. A prospective client who wanted to invest with us decided to put half of his wealth in cryptocurrency instead. That was the period when Bitcoin and cryptocurrencies were doing well.
Today, with US President Donald Trump being a big supporter of cryptocurrency, interest in Bitcoin and other cryptocurrencies is rising again.
But whether you should include cryptocurrencies in your portfolio really depends on your financial and investment objectives.
Investing for non-negotiable life events
We manage our clients’ money for their non-negotiable life events which include retirement, and goals such as taking a sabbatical year to volunteer for a cause.
The approach we use needs to give clients the highest probability of success. This includes a search for investments that will reliably give long-term expected returns. Such investments must participate in and contribute to global economic production because returns are generated from the value created through positive contributions.
If an investment does not create any added economic value, then we should not expect there to be long-term returns. As an example, equities and bonds are ways for investors to provide capital to a company for its business activities. The company is expected to create value for its customers through the delivery of goods and services. Investors receive returns if the business is successful, and lose money if the business is not successful.
Long-term returns from equities are based on companies’ expected future earnings. Cryptocurrencies, such as Bitcoin, are not such an investment. The returns from Bitcoin and its boom-and-bust history have come from speculation due to news and events. There is no pattern and almost no way for one to reliably predict the future prices of Bitcoin.
You have to honestly ask yourself: Do you want to rely on such a speculative instrument to achieve your non-negotiable life events and goals? And given the volatility, if you have parked a sizeable amount into it, would you be able to stay invested through that crazy ride? If your answer is no to both questions, Bitcoin and other cryptocurrencies are not suitable into your portfolio because it is simply too unreliable. And I have not even touched on the risk of your cryptocurrencies being stolen, the counterparty risk of crypto exchanges and fraud.
Is there no place for Bitcoin or other cryptocurrencies in your portfolio at all? My suggestion is that if you really want to invest in this “asset class”, do so after you have set aside funds for your non-negotiable life events and goals. Do not use money meant for such goals to invest in this alternative “asset class” because of its unreliability. Also, be prepared to lose money.
To refrain from investing into something that promises high-octane returns requires a heart of contentment, a philosophy that my company firmly believes in. Contentment is when you no longer crave or desire anything you don’t already have. But this is not a passive acceptance of your situation.
Rather, it is a conscious choice to enjoy, appreciate and accept what you have, while giving up craving for things you do not have. It requires you to know what is important in your life and accepting that you can’t have everything. It requires you to take time to really consider what are your non-negotiable life events and life goals.
Once your investment yields sufficient returns to achieve those objectives, you need not look at others who may have gained a higher return elsewhere.
The writer is CEO, Providend, South-east Asia’s first fee-only comprehensive wealth advisory firm
