27th Aug 2020

Why This is Just the Right Time to Add Bitcoin to Your Portfolio

Economic uncertainties and market volatility, due to the ongoing pandemic, have led to a remarkable year for cryptocurrencies. Bitcoin (BTC) has especially had a remarkable journey so far in 2020, with an increase in value of more than 60% till August. This has made the digital currency one of the best performing assets of the year. In fact, the price of BTC has surged 50% to 128% against major global currencies since the beginning of 2020. On August 26, 2020, BTC was trading at $11,393, having surpassed the $12,000 mark twice in the last 30 days. 

The rise of Bitcoin puts highlights the very reason for its creation, after the 2008 financial crisis. With people losing confidence in the monetary policies of major central banks and money in its current design due to the pandemic, BTC is looking like the perfect portfolio diversifier. Not only is it uncorrelated to the traditional financial markets, it has a limited supply, which has now become even more restricted after the 2020 halving event. 

It’s no surprise that major financial institutions and institutional investors are now adding BTC to their portfolio of assets. Here’s why you should consider it too. 
Simple economic theory states that the value of an asset diminishes as supply increases. The recent monetary expansion of the US Federal Reserve, of approximately $3.1 trillion, is expected to keep eroding the value of the US Dollar. The value of the Dollar index has continued to weaken over the past 5 months of the pandemic, reaching a 2-year low on account of an
alarming rise in Covid-19 cases, apprehensions regarding the US economic recovery, the impending US presidential elections and other factors.  

BTC, on the other hand, has a fixed total of 21 million coins. The May 2020 halving event decreased its supply by 50%. Comparing the lows and highs of the previous halving cycle, in 2016, BTC prices could hit $340,000, according statistics resource ChartsBTC.
Another reason for the weakness in major global currencies, like the USD and EUR, is the continuous injection of fiscal stimulus by governments around the world. The devastating effects of the coronavirus pandemic are expected to continue into 2021, and governments will have to resort to injecting liquidity into their economies to keep them afloat. After the $2.2 trillion stimulus was announced by the US government in March 2020, BTC price had surged 58%, rising from $6,580 to $10,400.  

Talks of a second stimulus package of $1 trillion are doing the rounds and this time too, BTC price could rise significantly. Analysts believe that just like the last time, when money flowed into the market and to the hands of retail and institutional investors, they will have more capital to invest in BTC and other cryptocurrencies. The fiscal stimulus package of March 2020 led to a 240% increase in the market capitalisation of the entire cryptocurrency market reaching an all-time high. 
The P/E ratio of the S&P 500 is close to historically high levels, reaching 23.2x, as of August 22, 2020. According to research by JP Morgan, since 1995, such high valuations have been followed by negative returns over the next 5 years. 

In short, the probability of long-term stock market valuations turning negative is increasing. In this regard, it could be useful for traders to diversify their portfolio with non-correlated assets like BTC, otherwise known as “safe-havens.” Since 2016, the one-year correlation between Bitcoin and the S&P 500 has been low, at 0.22, which means it can reduce risks in the portfolio during long-term market downturns. 

A study conducted by Finovate, together with the Frankfurt School of Finance and Management, revealed that a 1% to 5% allocation of cryptos to a traditional portfolio can increase the Sharpe Ratio and generate additional returns. 

The two prior halving events of BTC in 2012 and 2016 had led to a rise in Bitcoin price by a whopping 12,824% and 3,103%, respectively. The fact that 2020 is a similar year for BTC supply, combined with weaker asset valuations globally due to the pandemic-induced economic crisis, makes a strong case for BTC as an alternative investment. 

For those concerned about the volatility of BTC prices, derivatives like CFDs could be a great way to speculate on the overall price movement, in both rising and falling markets. 
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