Assessing Bitcoin's Role in Portfolios, Store of Value Traits

Bitcoin recently entered the $1 trillion in market capitalization club – lofty territory occupied by just a small number of U.S. equities. Even with that ascent, some familiar questions still burn for the largest cryptocurrency.

With digital assets, volatility should not be ignored, but two of the big issues for advisors to consider when discussing bitcoin with clients are its chops as a store of value and how much of a role it should play in portfolios.

Addressing the store of value first, it's fair to say many advisors – and their clients – are hearing the digital gold comparisons. Those aren't outlandish. There's a finite number of bitcoins in the world just as there's a limited number of ounces of gold to be unearthed.

Stores of value have one of two traits. They can intrinsic value, meaning the asset is an economic good, such as a bond, oil, a stock or a piece of real estate. Or an asset can have what's known as monetary value, which is essentially the way of valuing an asset that has no intrinsic value. Gold, silver and bitcoin are examples of assets with monetary value.

Store of Value Status Is Instructive

In the essence of “keeping it real,” I'll point out that considerable debate remains regarding bitcoin's status as a store of value. Some of this consternation results from the cryptocurrency's reputation for volatility. Some of it is owing to bitcoin's relative youth. And of course, there are market participants that simply fear new concepts. They like what's tried and true and leery of new kids on the block.

Still, bitcoin can add value to portfolios, particularly those of younger investors already familiar with digital asset or for risk-tolerant clients.

“Bitcoin may potentially increase portfolio diversification because of its low correlation to traditional asset classes, including broad market equity indices, bonds and gold,” notes Gabor Gurbacs, VanEck director of digital assets strategy.

Courtesy: VanEck

Another benefit of bitcoin is that it can act as a potent refresher of the old guard 60% stocks/40% bonds portfolio that many advisors relied on for decades.

“An allocation to bitcoin may also enhance the risk and return reward profile of institutional investment portfolios,” says Gurbacs. “As seen in the chart below, a small allocation to bitcoin significantly enhanced the cumulative return of a 60% equity and 40% bonds portfolio allocation mix while only minimally impacting its volatility.”

Participants Matter

I recently saw an article where a currency strategist opines about bitcoin's chances of reaching the $100,000 level – more than double where it resides today.

File that under the “what a great time to be alive” category, but the reality is there are reasons for advisors, in moderation, to mull bitcoin allocations.

One is increasing institutional adoption of the digital currency. BlackRock and Guggenheim Partners are among those making small bitcoin allocations in some active funds. Goldman Sachs is restarting its crypto trading desk. Those are just a few examples.

Then there is the everyday, practical usage case, which augurs well for the long-term bitcoin investment thesis.

“Bitcoin transactions have crossed 400,000 permission-less transactions per day, exhibiting significant network value,” says Gurbacs. “When looking at off-chain adoption and the number of applications being built on Bitcoin, we see a natural evolution taking place.”

Related: Believe It or Not, Bitcoin Hype Isn't Out of Control...Yet