We invest either to grow and preserve or to hedge our capital. So any investment should help in at least one of these goals. Bitcoin is beautiful in both senses. Indeed, it is as beautiful as investing in art!
Hedging: One good rule for adding a new asset to your portfolio is that it should not be closely correlated to your other asset classes. When assets are not correlated, they behave differently to each other, so even if there is a strong south wind in other asset classes, this asset could behave differently and therefore help in preserving capital. In that sense bitcoin is a great hedging instrument compared to other asset classes. It has shown that it does well in currency crises too. When Brexit happened and we saw the pound literally pounded, Bitcoin was standing and growing tall. It exhibited the same strength when the Chinese currency outflow was happening. So in short, when world fiat currencies are being printed left and right, we have something we can use as a hedging instrument. It is very much a digital nirvana of gold from the hedging angle.
Growth: People like Horowitz say bitcoin may rise to hundreds of thousands of dollars; others talk more in the range of five hundred. So there are different expectations, but the reality would be somewhere between that. There are many reasons for price increases, but the most conservative way of looking at it is that the total number of bitcoins is limited to 21 million, and bitcoin rewards get halved every 4 years. So purely by a supply/demand calculation, we should see a doubling of its value at least every 4 years, which is much more than any normal investor ever can produce as returns. Things are changing: the whole world is moving online, and that includes investment and money. Bitcoin happens to be the online currency, and it is reshaping so many different industries. So it stands to grow with massive fundamental support.
I will write more about bitcoins in the coming days, but if you feel bitcoin satisfies the two main simple reasons for investment, go for it. But to start, do not allocate more than 1% of your total portfolio to bitcoin. As you get more comfortable, you can invest further – but again, never forget the principle of diversification and asset non-correlation while investing.
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