Bitcoin is the largest and most established digital currency (aka “crypto-currency”). Bitcoin utilizes blockchain technology to facilitate transactions on a peer-to-peer basis. It is a decentralized currency that is not issued by a central bank: whereas the Federal Reserve (Fed) issues U.S. dollars or the European Central Bank (ECB) issues euros, the supply of bitcoin is set in advance and finite.
What is Blockchain?
Blockchain technology is an open-source, publicly available ledger that underpins bitcoin transactions. The technology stores the complete transaction history of all bitcoins and is structured in a way that is secure from tamper and revision. Whenever a bitcoin transaction takes place, it is added to the blockchain ledger as a new “block” in the “chain.” Because the ledger is publicly available, the technology allows all parties to confirm the legitimacy of the bitcoin before executing a transaction.
What is Bitcoin Mining?
Unlike mining in the traditional sense, bitcoin miners utilize high powered computers to both verify transactions and unlock new bitcoins. Bitcoin transactions rely on these miners to validate a transaction using a complex mathematical algorithm. Miners compete, and the first to solve the problem processes the transaction. In return, the miner is rewarded with a predetermined amount of bitcoin.
How Many Bitcoins are there?
There is a predefined supply of 21 million bitcoins and approximately 20 million bitcoins are currently in circulation. The remaining bitcoins are set to be released over time by way of the above mining process.
How Can I Invest in Bitcoin?
In early 2024, the SEC approved several exchange traded funds (ETFs) that track the price of bitcoin. This development provides investors with much more convenient access vs. holding bitcoin directly and enables investments in bitcoin in both retirement and taxable accounts. Many of these ETFs are managed by large, well-known fund managers.
How Much Should I Invest in Bitcoin?
Each investor’s situation and risk tolerance are unique. For those considering an investment, the most important consideration may be the potential for significant drawdown events. Studies have shown that a bitcoin allocation between 1%-5% within a diversified portfolio historically provided enhanced risk-adjusted return benefits over extended periods of time. Ultimately, the decision of how much to invest in bitcoin is up to the individual.
Isn’t Bitcoin Volatile?
Yes. An investment in bitcoin doesn’t come without risk. Bitcoin has experienced very strong upswings in the past, but volatility works in both directions, and large drawdowns should be expected. Since 2010, the five largest drawdowns were: -94% (2010), -94% (2011), -85% (2015), -84% (2018), and -78% (2022). If you’re not willing to stomach these potential drawdowns, bitcoin may not be right for you.
Hasn’t it Performed Well?
Despite significant volatility and drawdowns, bitcoin has performed well over time, with the 10-year annualized return ending Dec 31, 2023 +49.6%. Historically, the longer an investor held bitcoin, the greater the chance of positive returns. Since 2010, the longest stretch between new highs was a little over three years (November 2013 to February 2017). Of course, past performance is no guarantee of future results.
What do Proponents Say?
The primary value proposition referenced is that bitcoin provides access to a sovereign base currency, independent of any central bank. Bitcoin has a predefined level of supply that cannot be inflated by a central bank. It is thus sometimes referred to as the “new gold” or “digital gold.”
Supporters argue bitcoin helps facilitate faster, cheaper, and more secure direct transactions globally without the need for a bank or financial institution.
What do Critics Say?
Skeptics believe that because there is no physical asset backing bitcoin, it is inherently worthless, and its value is entirely predicated on the greater fool theory: that someone is (irrationally) willing to pay more for it than you did.
Critics also point to bitcoin’s high level of volatility, which they believe precludes it from being a viable currency; because bitcoin’s daily price changes are highly unpredictable, it is difficult to price things in bitcoin with any degree of certainty.
Is Bitcoin Part of Mission Wealth Model Portfolios?
No. We don’t believe the risk profile of bitcoin is suitable for most client portfolios.
Can I Buy Bitcoin in a Mission Wealth Portfolio?
Yes. If a client is interested in adding bitcoin to their broader household allocation, they can do so by request. We would recommend any investor consider the risk profile and volatility of bitcoin before investing and shouldn’t invest more than they are willing to lose.
Bitcoin Studies
For additional information and a list of studies focused on the role of bitcoin within a portfolio, please see below:
- Apollo: “Introduction to Digital Assets”
- DWS: “A Bit of Bitcoin. Considerations for an Allocation”
- Fidelity: “The case for bitcoin”
- Franklin Templeton: “Bitcoin as an investable asset”
- MSCI: “Bitcoin and cryptocurrencies. The arrival of a new asset class?”
- VanEck: “The Investment Case for Bitcoin”
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