The Case for Investing in Bitcoin During Cryptocurrency Winter
Winter has come to the land of Cryptocurrency, Bitcoin (BTC). This is the second “bitcoin winter,” and we expect more such seasons in the future.
In these frigid times, users may ask their advisors why they endorse owning one of the most volatile assets in the asset management history. These users don't tend to mind the volatility on the upside, but they can lose their spirit on the way down.
For that cause, sometimes all they require is a reminder about how the advantages of bitcoin and long-term benefits of investing in it – could greatly outweigh the downside risks.
Bitcoin is a Survivor
Since its beginning 13 years ago, bitcoin has gone down in value by over 50% half a dozen times. And of those instances, four led to sustained Cryptocurrency Winters in the market.
Bitcoin, however, has managed to stay afloat successfully from all of the Cryptocurrency Winters prior to the most recent slump. That gives us assurance that bitcoin can survive yet another downturn.
And bitcoin, in particular, has been more robust throughout changes in market seasons than any other digital project in the Cryptocurrency Market.
Take a look at the top 20 Digital Currencies at the moment. Now wind the clock back just 5 years to the onset of the last bull market run. How many of the top 20 digital currencies then remain on the leaderboard? How many of them have ever come back to their former glory, relative to bitcoin, over two market price cycles?
Stratis, bitshares, bytecoin, golem, steem, saicoin, bitconnect … these tokens do not even trade within the top 100 by market capitalization anymore. A historical snapshot shows that even the top 10 coins by market capitalization have endured incredible volatility over the recent years.
Of all the digital currencies that people trade today, Bitcoin has continued to be the largest by market capitalization since its inception over 13 years ago. All this while, it has delivered handsome investment returns over every five-year historical period.
Bitcoin Enhances a Portfolio
Modern portfolio management theory supports the idea that “the whole is greater than the sum of its parts.” Bitcoin, alongwith with other diverse assets, could help protect investors against and allows them take advantage of – an array of economic scenarios.
Even after the recent slump in bitcoin's price, analysis still supports the advantages of bitcoin's inclusion in a diversified portfolio. The numbers are quite clear – bitcoin has added value to diversified portfolios.
Bitcoin Outscores Gold
While bitcoin offers multiple ways to win as an investment choice, the clearest case is as "digital gold."
Like gold, bitcoin is a monetary asset and a store of value. Bitcoin shares the distinctive factor of scarcity that people love so much about gold.
But when measured against many of the most important characteristics of money, bitcoin has a number of benefits over gold, including transferability, divisibility, whether it can be seized, safety and privacy.
We can send bitcoin digitally in unlimited amounts, unlike the case with gold. We can easily divide it up into small portions, unlike a gold bar. While bitcoin is still emerging and not immune to cyber-attacks, it can be held safely in an encrypted digital wallet as opposed to gold bars that are difficult to keep safe. And, unlike gold, bitcoin can be exchanged without banking and governmental mediators that directly monitor payments.
One additional benefit of bitcoin: At less than 4% of gold's total value today, bitcoin still has further ground to run.
Bitcoin lets people be their own bankers
Most clients of financial advisors are not yet ready to hold their own bitcoin. They would instead hold it as part of a cryptocurrency exchange traded fund, for example, than to purchase it on a Cryptocurrency Exchange.
But, over time, many of these clients will become futurists and be more motivated to trade bitcoin themselves. In expectation of economic turmoil in the future, they will recognize the advantage of having some portion of their net worth in such an asset that is extremely difficult to seize and that can be moved to any location that has an internet connection.
Because bitcoin does not require mediators that possess the asset, everyday people can maintain ownership of it, unlike with fiat money that is vulnerable to bank runs during extreme economic downturn scenarios.
The real risks
- Technical failure of the system
One of the few instances that could cause to change investment thesis on bitcoin is when there is technical failure of the system. If the Bitcoin network stops cranking out blocks of transactions frequently, that's a major red flag.
- Regulation
Is tougher regulation coming for Digital Assets? Undoubtedly.
That's why, from a regulatory viewpoint, there's never been a better period to own bitcoin.
Analysis indicates it is the only major digital currency that is unambiguously not a security based on the securities industry standard Howey Test. U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler seems to agree.
- Government rectitude
If you think the Federal Reserve is going to push the economy into a depression to flush out the debt that has accumulated over the past eight decades, then you might want to avoid hard money assets like gold and bitcoin. Dollars will be king.
But if you think the powers that be would prefer not to bring on a second Great Depression and that the far more likely path to dealing with the debt is inflation, then bitcoin probably has a role in your clients' portfolios. In my view, regulatory bodies will struggle to contain inflation in the 2020s – so much so that bitcoin may become the most important major Digital Asset in clients' portfolios.
If that scenario unfolds, financial advisors will find themselves struggling to explain how they missed the most important major Digital Currency of the decade.
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