Investing in Bitcoin. Credit: Pexels, Worldspectrum
Bitcoin, the world’s most well-known cryptocurrency, recently surpassed the $100,000 (€95,149) mark. This milestone has led BlackRock, the world’s largest asset manager, to recommend including Bitcoin in diversified investment portfolios.
In its report, Sizing Bitcoin in Portfolios, BlackRock highlights how Bitcoin can help investors spread risk.
Why BlackRock recommends Bitcoin
BlackRock advises that Bitcoin, which has often been seen as highly risky, is maturing and could be an excellent addition to a well-balanced investment portfolio. The company suggests that a small allocation, only around 1-2 per cent of a typical 60/40 portfolio (a mix of 60 per cent stocks and 40 per cent bonds) could bring benefits through diversification.
Bitcoin’s total value, estimated at $2 trillion (€1.9 trillion), puts it on par with the combined market size of major tech companies such as Google and Microsoft. According to BlackRock’s Chief Investment Officer, Samara Cohen, Bitcoin’s unique features, such as its independence from traditional markets, make it an appealing way to reduce reliance on other assets including stocks.
Why is Bitcoin gaining traction?
Bitcoin operates without central control from banks or governments, making it particularly appealing during times of political and financial uncertainty. Bitcoin’s value doesn’t usually move in sync with stock or bond markets, making it a useful way to spread risk in a portfolio.
BlackRock notes that Bitcoin could see the biggest returns while it’s still gaining wider acceptance. However, this phase also comes with higher risks.
Also, Bitcoin’s price swings can be extreme, with past losses of up to 70 per cent in a year. Investors must be ready and stoic for sudden changes.
The future of Bitcoin
If Bitcoin becomes more widely accepted, its value could stabilise, reducing its potential for massive price increases. In that case, Bitcoin could act more like gold – a way to protect generational wealth rather than a fast-growing investment. In a recent Euro Weekly News article, Spanish banks were reported to soon be offering cryptocurrency services like buying, selling, and storing digital currencies such as Bitcoin.
BlackRock’s research shows that even a small Bitcoin investment affects overall portfolio risk. For example, a 1 per cent allocation adds 2 per cent to overall risk, while a 2 per cent allocation increases it to 5 per cent. Going beyond 2 per cent could significantly increase portfolio risk, particularly during volatile market conditions.
