Why Money Managers Are Getting Into Bitcoin

Billionaires have been increasingly accumulating bitcoin in recent months as there are major factors to why they find it a valuable asset. We’ve heard of the legendary investor Paul Tudor Jones being favorable towards bitcoin and it has sent a ripple effect throughout the financial industry. Stanley Druckenmiller has become the latest billionaire to publicly disclose his bitcoin investment, adding the “smart money getting into bitcoin” narrative.

Microstrategy, Square and Grayscale are reputable companies that are bringing credibility to bitcoin. The increased institutional participation is likely to create upward pressure on prices. This is already seen in the number of addresses holding at least 100 bitcoin ($1,531,144). The number rose to 4-year highs at the end of October.

Why the demand? Because these investors consider bitcoin Gold 2.0. Gold is considered as a method of insurance to protect a portfolio from market corrections and macro uncertainty. Typically, a gold investment does not provide a significant return but bitcoin does. This is because when you compare to gold’s $9 trillion market cap sun, bitcoin’s $285 billion market cap is only a dwarf star.

An additional feature that gold does not have is a determined finite supply with the production being halved every 4 years. When the supply declines and demand increases, a supply squeeze is imminent, causing prices to go higher. This provides a good risk-to-reward ratio.

Bitcoin is also inversely correlated with the U.S. dollar index (DXY), providing a great hedge against a weakening dollar due to inflation.

The inverse correlation between Bitcoin and the DXY. Source: TradingView.com

Inflation is something that the current financial system relies on so it will stick around until we find an alternative to our current economic structure.

Financial advisers should also reconsider the asset as a diversification tool. It does not have to be a singled out investment, 1–3% is sufficient to provided decent exposure. It has historically preformed well as a portfolio asset, returning decent gains to a balanced 60/40 stock-bond based portfolio.

Performance of a portfolio with Bitcoin. Source: Bloomberg, Yahoo Finance, Fidelity Digital Assets, Dan Tapiero

As shown in the chart above, having a 3% exposure would have increased your 5 year gains from 6.8% to 10.2%, how’s that for a risk-to-reward?



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