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Key points
- Bitcoin and other cryptocurrencies have long divided opinions
- Some see the asset as digital gold, others consider it worthless
- Let's take a look at what this investing expert reckons…
Most investors would now acknowledge that Bitcoin (CRYPTO: BTC) and other cryptocurrencies are now very much part of the mainstream investing zeitgeist. But that doesn't mean cryptocurrencies aren't still enormously divisive and controversial assets.
There is still a large camp of investors convinced that Bitcoin and other cryptos are on course to change the world as we know it. But there is still another large camp that consider Bitcoin to be one of the biggest investing hoaxes of all time.
Hamish Douglass of Magellan Financial Group Ltd (ASX: MFG), for example, falls into the latter camp. Last year, we discussed his remarks describing cryptocurrencies as having "zero intrinsic value" and "one of the greatest irrationalities I've seen in a very, very long period of time".
Hero or zero?
So even if one doesn't fall into one of the two camps described above, how does one view Bitcoin? Is it an asset class that can provide some positive diversification to your average ASX investing portfolio?
Investors often use different asset classes to diversify their own portfolios. For example, many investors invest in both shares and property because these markets largely move independently from each other. The same goes for gold or government bonds.
Some investors do indeed think that Bitcoin can fulfil this role. Many describe Bitcoin as 'digital gold', an inflation hedge or an effective store of value. Those traits would indeed likely give it a useful role in portfolio diversification. But let's see what an investing expert reckons. Mike Young, of Mason Stevens, recently shared his views on this matter on Livewire.
Does Bitcoin give a portfolio diversification?
Mr Young was asked about the role that Bitcoin could play in diversifying a portfolio. He makes some interesting observations. Young points out that Bitcoin is not as 'uncorrelated' to other asset classes as people think, especially over short periods of time:
Over the long run, [diversification using Bitcoin] makes sense – as cryptocurrencies purport to reshape global financial systems – and therefore will be beholden to different narratives.
However, it has become increasingly more obvious over the last two years that cryptocurrencies are still very much affected by the incumbent financial system – particularly over the last few months as cryptocurrencies have fallen lockstep with equity markets.
Bitcoin can serve as an effective point of diversification within investor profiles over longer-term time horizons, where the factors that shape long term valuations differ greatly from traditional markets.
It's that distinction between 'short-term correlation' and long-term correlation' that is interesting. In short, Young seems to be saying that Bitcoin won't help protect your portfolio from market volatility. But it can still be useful as a long-term diversification instrument.
There is no easy answer here. Bitcoin's future is arguably more uncertain than any other asset class due to its currency-like structure, and its relatively recent ascension. Perhaps that's why Young cites billionaire hedge fund manager Ray Dalio's recommendation of a portfolio allocation to Bitcoin at around 2%.
But only more time will tell as to what role Bitcoin will play in our financial system. And what role it should play in our investing portfolios.
