Why Every Investor Should Have Bitcoin in Their Portfolio

The guest commentary below was written by Sam Callahan of Swan.com. This piece does not necessarily reflect the opinion of Hedgeye.

If you ever invested just 1% of your money in Bitcoin, then you increased your portfolio’s returns, while reducing risk, 100% of the time over 3-year periods. 

Sound too good to be true?

It doesn’t matter if you’re a young person starting to invest, a parent saving for their kid’s educa­tion, or a retiree protecting your nest egg, Bitcoin has a place in everyone’s portfolio.

Bitcoin offers many unique benefits when added to a tradi­tional portfolio including increased returns, decreased risk, and protec­tion from infla­tion. Where many see it as a specu­la­tive asset, in reality, Bitcoin is a top-performing asset where a little bit can make a big impact on a portfolio.

Rare in a World of Plenty

Bitcoin is a new form of money where the supply is fixed by math instead of deter­mined by a small group of central bankers. It functions outside the control of any single govern­ment or entity.

There will only ever be 21 million bitcoin and this programmed scarcity allows it to act as a store of value. As more people view Bitcoin as a store of value, the demand for it increases, and with it, the price.

Bitcoin’s fixed supply could not be more opposite than what we’ve seen happen to the US dollar. The dollar’s supply increased over 25% in the last year alone! The US printed >$12 trillion dollars in just 2020.

People are now starting to feel the effects of this printing ripple through the economy in the form of infla­tion. Investors are worried, and right­fully so. Take a look at some of the news headlines over the past few months.

Infla­tion is defined as the rise in the prices of goods and services in the economy. Last month the main infla­tion measure, the CPI, was reported at 5%.

That may not sound like a lot on the surface but when you frame it a little differ­ently, I think the number hits closer to home.

“At a 5% annual infla­tion rate, your cash will lose 50% of its value in 10 years.”

(Please read that again slowly)

Infla­tion is watching every­thing around you get more and more expen­sive as your savings are able to buy less and less. Further­more, if your income doesn’t rise with the prices, well, then life starts to feel unafford­able. That’s why investors are looking for assets besides dollars to store their wealth in order to protect themselves against the risk of their savings being devalued, and more and more people are choosing Bitcoin.

Let’s put it this way — if it’s been raining for weeks, and everyone is warning you that it’s about to flood, wouldn’t you buy a little flood insur­ance just in case? 

Bitcoin can be thought of the same way except with Bitcoin you’re buying wealth insur­ance. Since no more than 21 million bitcoin can ever be printed, the supply will never inflate like the US dollar, and each bitcoin will hold its value over time. 

Bitcoin is protec­tion against infla­tion, and every­body needs that protec­tion in their portfolio today. Infla­tion is already here. The only question now is, how long will it last?

Spread Your Bets

With finan­cial and polit­ical insta­bility, civil unrest, and a global health crisis, it’s never been more impor­tant to spread your bets out and diver­sify your money across different assets to protect yourself.

Most people agree with the idea that you shouldn’t put all your eggs in one basket, so they invest across real estate, stocks, bonds, etc. But what they fail to realize is that all of those assets are 100% exposed to the tradi­tional finan­cial system. Bitcoin is different. It functions all on its own, 24 hours a day / 7 days a week / 365 days a year, without any single entity control­ling it. 

Because of this unique indepen­dence from the old finan­cial system, Bitcoin histor­i­cally is not corre­lated to any assets. It marches to the beat of its own drum. This non-corre­la­tion is what makes it the perfect asset to add to a portfolio in order to diver­sify and reduce risk. Bitcoin can offer downside protec­tion when all the tradi­tional assets in your portfolio are falling because Bitcoin doesn’t histor­i­cally move with other assets. 

“Bitcoin’s corre­la­tion to other assets between 2015 – 2020 is an average of .11, indicating that there is almost no relation­ship between the returns of bitcoin and other assets” -Fidelity Digital Assets

This special trait of lacking corre­la­tion to other assets is extremely rare in investing and makes Bitcoin a must-have addition to everyone’s portfolio to decrease risk in the high-risk environ­ment we find ourselves in today.

Bang For Your “Buck”

The beauty of Bitcoin is because of its uncor­re­lated nature and perfor­mance record, an investor only needs to allocate a very small percentage of their funds for it to make a meaningful impact on their portfolio.

Check out the graphs below. A 1% Bitcoin alloca­tion returned over 15% more than a portfolio of just stocks and bonds while decreasing the risk of the portfolio. In other words, it boosted the returns while making the portfolio safer at the same time. 

Essen­tially you can receive all the benefits of Bitcoin, the infla­tionary protec­tion, the risk reduc­tion, and the huge gains with only using a small amount of your money. If Bitcoin goes to zero, you lose 1%. No big deal! But if the price of Bitcoin continues to soar, then you could benefit greatly from your 1% position. The risk-reward with Bitcoin is unpar­al­leled in the investing world. 

A 1% alloca­tion gives you a lot of bang for your buck because the perfor­mance of Bitcoin through the last decade is hard to match. It’s been the best performing asset in nearly every year for the past 10 years. Plus when you compare it to other stores of value that investors look to in times of infla­tion like gold and stocks, Bitcoin is the obvious winner.

By now I hope you’re asking yourself — Can I afford to take 1% of my stocks/bonds/cash and put it into the best performing asset of the past decade, knowing now that it also reduces risk and adds infla­tion protection?

To me, this is an absolute no-brainer and it’s exactly why everyone reading this should own some Bitcoin in their portfolio. Buy wealth insur­ance today. Buy Bitcoin. 

EDITOR'S NOTE

Sam Callahan is a Bitcoin Analyst and educator at Swan Bitcoin. He graduated from Indiana University with degrees in Biology and Physics before turning his attention toward the markets. He writes the popular "Running the Numbers" section in the monthly Swan Private Insight Report. Sam's analysis is frequently shared across social media, and he's been a guest on popular podcasts such as The Investor's Podcast and the Stephan Livera Podcast.