And why you should use it to diversify.
October’s National Cryptocurrency Month. It’s also National Pizza Month. We prefer pizza, but no matter how you feel about crypto, allocating even a small portion of your portfolio to it can help you diversify while offering potentially enormous upside.
We’re aware that the impression of crypto bros bragging about future riches from the confines of their parents’ basements doesn’t elicit hope or attract newcomers. Nor does the 59% fall Bitcoin (BTC) experienced after hitting its all-time high of $68,789 in November 2021.
However, it’s increasingly popular despite the so-called crypto winter that may (or may not) have ended earlier this year, and adoption will only continue to climb in the years to come. In that regard, nobody’s missed the train yet. Even if its earliest investors were able to purchase BTC in 2009 at 1/10th of a cent and it’s currently trading near $27k.
In fact, if you haven’t invested in crypto yet, consider yourself fortunate. People sucked in by cryptomania over the past few years suffered losses that, in many cases, will forever turn them off to the idea of investing in it again.
But the same stories can be told about anyone that bought high before the dot-com bubble burst. Or before 2008’s housing collapse. In fact, there have been 24 stock market corrections since WWII in which investors have been burned by an average loss of -33.38%.
And guess what? Most of them still invested afterwards. Because for opportunistic investors, that’s when shares are on sale. Between April 2001 and March 2003, Ford shares careened from $29.61 to $7.41. Today, the company’s market cap is $50 billion. People keep coming back. So why not Bitcoin, and its $512 billion market cap?
What Is ‘Real’ Money, Anyway?
Before dismissing digital currency as “fake money,” consider how it’s no different than fiat currency — like the U.S. dollar — since the gold standard was abandoned.
Sure, you can go to an ATM and withdraw paper currency that you can actually hold. But what’s its real value? Whatever the Federal Reserve says it is? Or how much the U.S. Mint decides to print, which is seemingly endless?
In 2023, nearly all of our financial transactions are digital. When you buy stock, companies don’t provide paper certificates or mail dividend checks. When you pay your bills, you no longer rebalance your checkbook.
So momentarily put that argument on hold and let’s understand why having an entirely intangible asset does, to some extent, belong in your portfolio. Yes, its inherently volatile and carries serious downside risk. But owning even a little crypto, over the long term, can provide enormous gains.
What’s useful is having realistic expectations of what crypto can do for our portfolios. No dreams of Lambos or rocket ship-rides to the moon. Just crypto as a component of well-diversified holdings.
Why Diversify?
To quote Warren Buffett, “Diversification is protection against ignorance.” To put it in gentler terms, don’t put all your eggs in one basket. When we diversify our portfolios, we’re hedging against losses in certain assets with other assets.
We’ve discussed this before. But diversification isn’t only achieved by varying your investments among traditional investments like stock, bonds and ETFs. Including alternative investments like real estate, collectibles and crypto will help you further insulate your portfolio.
Heck, Costco’s now selling gold bars for people who want to own physical precious metals. And they’re selling out within hours. That’s probably due to people expecting economic doomsday any minute now, but nonetheless, it demonstrates our point: diversify, diversify, diversify.
By spreading your investments across multiple asset classes, you reduce the likelihood of your portfolio experiencing outsized losses overall. If you’re overallocated to stocks and the market dips, it’ll hurt. If your overallocated to bonds and rates plummet, the same. And for anyone that was all-in on crypto in November 2021, difficult lessons were learned.
The idea is to find the right balance — for you — between high-, medium- and low-risk investments and allocate accordingly. And doing so, over the long term, will ensure safer and stronger performance.
Learn the Basics
Investing in crypto doesn’t require a degree in tech or finance. You don’t need to know how to mine it or what Bitcoin’s halving cycle is. You don’t need to be proficient in gas fees or smart contracts (though it helps) or understand the defining characteristics of centralized and decentralized exchanges (which also helps).
You just need to know the basics. If you’re new to the space, we’ve included some resources below that can help you understand the ins and outs of crypto. But if you possess even foundational knowledge yet have hesitated to get into the market, there are now ways to ease into it through traditional equity exchanges.
More on that in a bit. But first …
Why October?
It isn’t a coincidence. October’s National Crypto Month because it’s historically one of the best-performing times of the year for digital assets. Since Bitcoin is the bellwether of crypto — and the largest by market cap — looking at what that coin’s done in the past helps understand why October’s notable.
Since its debut, Bitcoin’s averaged +20% returns in October, providing investors with gains in seven of the past eight years. And since Oct. 1, 2022, BTC’s up 40% (including a 62% gain so far this year).
And with Bitcoin’s volatility recently dropping to a six-year low, October seems poised to repeat as a strong month for the king of crypto. But again, if you’re not yet comfortable making a purchase through a crypto exchange, there are other options that can help you gain exposure in ways you’re probably already comfortable with as an investor.
Not Crypto-Ready Just Yet?
You can now invest in Bitcoin-leveraged exchange-traded funds (ETFs) through traditional exchanges like the Nasdaq and NYSE. These ETFs provide you with exposure to digital assets without having to own them.
Can you do this? Yes. Should you? Probably not. At least not now. At Rise & Hedge, we do our homework. A lot of it. Because the last thing we want to do is provide our readers with subpar personal finance and investment recommendations.
So we looked into the performances of the major blockchain and Bitcoin ETFs since their inceptions:
- ProShares Short Bitcoin Strategy ETF (BITI): -46%
- VanEck Bitcoin Strategy EFT (XBTF): -55%
- Valkyrie Bitcoin Strategy ETF (BTF): -59%
- ProShares Bitcoin Strategy ETF (BITO): -65%
- Global X Blockchain & Bitcoin Strategy ETF (BITS): -70%
- Global X Blockchain ETF (BKCH): -73%
And while investors in those funds continue to get hosed, their fund managers continue to get paid for what can only be described as atrocious performance.
Rather than those leveraged ETFs, if at the start of this year you invested in the two largest cryptos by market cap — the aforementioned BTC and Ethereum (ETH) — you’d be sitting on gains of 62% and 39%, respectively.
TL;DR
Diversifying doesn’t require allocating thousands or even hundreds of dollars to any asset class. Dipping your toes into crypto with money you can afford to lose can help expose you to alternative assets, hedge your portfolio’s other holdings and set you up for potentially enormous gains.
Resources
Crypto 101: SoFi’s Crypto Guide for Beginners
Crypto questions: Coinbase Learn
Investopedia: Cryptocurrency Strategy & Education