I’ll admit, I’m not much of a supporter of Bitcoin, or cryptocurrencies in general. However, I do understand these are unique assets and they could have some uses in the future. It all comes down to adoption. The more people that use Bitcoin, the more accepted it will become around the world, which will lend legitimacy to its claim it can function as a global currency.
Growing technology We’re still far away from the day when Bitcoin is universally accepted globally. Nonetheless, with tens of billions of dollars being invested in cryptocurrency technology, it might only be a matter of time before we reach this point.
There’s also the argument that Bitcoin could be a substitute for gold. Indeed, the cryptocurrency has a lot in common with yellow metal. Its value is fixed on an exchange and cannot be manipulated by governments. It can also be used like gold to buy and sell goods around the world, although the number of vendors that accept Bitcoin is still quite small at the moment.
Considering all of the above, I can see why some investors might want to own Bitcoin in their portfolio.
Asset allocation If you do, I recommend treating it like gold. Most wealth managers will suggest investors should have at least some exposure to gold. The precious metal provides a good hedge against market volatility and is relatively immune to inflation (the price of gold tends to rise steadily in line with inflation over the long term).
However, gold is a relatively poor investment compared to equities. For example, over the past 10 years, the FTSE 100 has produced an annualised return for investors around 10%, compared to a return of just 3% per annum for bullion. Over the past three decades, gold has returned 4.2% per annum.
As a result, if you do want to include gold in your portfolio, the general rule of thumb is that you invest between 5% and 10% of your wealth in the yellow metal.
The Bitcoin approach I would recommend the same approach Bitcoin if you really want exposure to the cryptocurrency. Allocating 5-10% of your portfolio to the asset would allow you to benefit from any upside, while at the same time limiting any potential losses. Losing 10% of your wealth might be painful, but it’s not a disaster. You could probably make this money back in two or three years, assuming the rest of your portfolio is invested in equities and these return 8% per annum.
Of course, if you are very bullish on Bitcoin, then you could invest and lot more, but this isn’t something I would recommend. If you’re saving for the future, it’s always best to own a well-diversified portfolio of assets to protect your wealth from any unforeseen developments. This will ensure that when you come to retire, you have enough saved up to live comfortably.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019