Why Advisors Shouldn't Miss Out on Evaluating Bitcoin

Bitcoin turned 15 years old last month and that birthday nearly coincided with the day on which 10 exchange traded funds tracking spot prices of the cryptocurrency debuted in the U.S.

To be sure, both are significant events and underscore the point that essentially all advisors are at least aware of bitcoin. Awareness is starting a point, but with today’s clients increasingly crypto-interested, it could literally pay for advisors to up their crypto proficiency levels. After all, bitcoin is now more accessible to advisors thanks to the spot ETF launches and the digital currency has a market capitalization of nearly $876 billion as of late Feb. 7.

Oddly enough, with that market value, bitcoin is larger than Berkshire Hathaway (NYSE: BRK-B). Oddly because Warren Buffett is no fan of crypto, but admittedly, this isn’t an apples to-apples comparison. Point is, at $876 billion, bitcoin is too large to be ignored.

Indeed, bitcoin isn’t appropriate for all clients, but it’s too large to be ignored and too many clients and prospects want to know that their advisors possess some cryptocurreny knowledge. With those factors in mind, here are some reasons why advisors should consider even modest allocations to the largest digital currency.

Performance, Scarcity

“Past performance isn’t a guarantee of future returns” is arguably overused in the world of finance, but it always rings true. It’s also appropriate when discussing bitcoin – an asset with a reputation for high volatility and vicious drawdowns.

Still, the overall performance of bitcoin over its 15 years on the market is breathtaking. VanEck does an excellent job of synthesizing those gains for various periods ending Dec. 31, 2023. Look at the bullet points below.

  • 1 year: 156.62% return

  • 3 years: 50.00% return

  • 5 years: 999.77% return

  • 7 years: 5,147.10% return

  • 10 years: 6,172.12% return

In eight of the 11 years spanning 2013 through last year, bitcoin was the best-performing asset class. On only one occasion (2014), did domestic stocks beat the cryptocurrency. Commodities accomplished the feat during the crypto winter of 2022 and bonds did so in 2018.

Then there’s the element of bitcoin scarcity, which is something to note ahead of the April halving. Bicoin halvings make mining of the currency more difficult and there will only ever be 21 million of the digital coins. So while the likes of gold and platinum are precious and rare, their scarcity doesn’t compare with that of bitcoin.

“The price of Bitcoin has rallied leading up to and following a phenomenon known as ‘halving’, which occurs about every four years, reducing the reward miners receive for validating transactions by 50%. So far, halvings have occurred in 2012, 2016, 2020, with the next one set for around April 2024. If history is any guide, Bitcoin has the potential to perform well through 2025,” adds VanEck.

Speaking of Gold…

By now, many advisors are likely aware that bitcoin is often referred to as “digital gold.” Gold bugs and other market traditionalists don’t like that comparison, but crypto “nerds” are warm to it.

The criticism stems from gold being a centuries-old asset that’s a proven store of value. To its credit, bitcoin may be earning its store of value chops as it matures.

“As time goes on, the mining process becomes increasingly difficult, making it more challenging to produce new coin,” concludes VanEck. “This scarcity mirrors the appeal of precious metals like gold, often considered a long-term store of value. As a result, Bitcoin has garnered attention as a potential digital alternative to traditional safe-haven assets. So, Bitcoin may be a good fit for clients looking to hedge against inflation, preserve wealth over the long term, and diversify their portfolio.”

Related: It Pays To Be a Financial Planner. Literally.