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How Much Crypto Should Be In Your Investment Portfolio?

Cryptocurrency adoption is increasing. As a result, many are wondering whether they should include crypto in their portfolios. Figuring out exactly how much is the next challenge.

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Cryptocurrency adoption is increasing. As a result, many are wondering whether they should include crypto in their portfolios. Figuring out exactly how much is the next challenge.

The increase in adoption by companies like PayPal, the investment by institutions like Rothschild Investments and the recent Coinbase listing are making it harder to deny that cryptocurrencies are becoming a common feature not only in the world but in a well-rounded portfolio.

There are several who suggest different allocations based on the typical 60/40 stock/bonds portfolio. However, by using the Black-Litterman Model, investors can allocate the amount of crypto they hold according to their confidence in its growth potential.

Institutional investors’ interest in bitcoin

Just two years ago, Shark Tank celebrity investor Kevin O’Leary called bitcoin (BTC) “garbage.” Last year, he released a video entitled, “Why I’m Not Investing in bitcoin!”

However, as the total market capitalization of crypto recently surpassed $2 trillion, it’s become almost impossible for institutional investors to ignore.

Even O’Leary has changed his tune. Last month the celebrity investor announced he would be allocating 3% of his portfolio to bitcoin. For someone with a net worth of $400 million, this allocation amounts to $12 million worth of BTC.

Other companies have been setting a similar example over the past year. In August 2020, MicroStrategy invested $250 million in bitcoin. Since then, they’ve spent a total of $2.226 billion on bitcoin.

Payments service Square Inc. followed suit in October 2020, investing $50 million in bitcoin. It recently raised this by another $170 million. Finally, Tesla made a big splash in February 2021, investing $1.5 billion in the cryptocurrency. 

As with all investments, increased interest from these big players trickles down to smaller-scale investors who are interested in making smart portfolio moves.

Understanding bitcoin for your portfolio

Investors wanting to figure out how to invest in cryptocurrencies first have to understand them.

Investment firms are starting to provide explainers to potential clients. For example, Fidelity Investments released the report ‘Understanding bitcoin.’

In the report, Fidelity Head of Director of Global Macro Jurrien Timmer describes bitcoin’s growth potential and compares it with other assets to help investors understand it better.

Potential exponential growth

Timmer states that an increasing number of investors and portfolio managers consider bitcoin a legitimate and distinct asset class. Bitcoin, he explains, is a finite asset with a unique supply and a unique demand dimension. However, its distributed nature enables a network effect, which is not the case with other assets.

Specifically, Timmer refers to Metcalfe’s Law. Essentially, Metcalfe’s Law says that as the number of its users grows linearly, a network’s value grows geometrically.

Putting it another way, bitcoin’s utility, in this case, value, should grow much faster than its network of participants. Timmer notes that bitcoin’s growth curve appears to still be in its early, exponential phase—and could remain so for several years. This indicates a bullish case for bitcoin. As its demand could grow exponentially, its supply remains fixed at a total of 21 million.

Digital gold vs physical gold

Timmer then points out that some see bitcoin as a form of “digital gold.” This is because bitcoin could act as a stable store of value, potentially offering protection against inflation.

In this era, where economic stimulus against the coronavirus has seen governments all over the world printing money at an unprecedented rate, bitcoin may be stealing some of gold’s thunder when it comes to being a hedge against inflation.

Besides being easier to transfer and hold, Timmer notes that bitcoin has one unique advantage over gold — its finite supply. “Gold is scarce but not getting any scarcer,” he says in the report. 

Timmer concludes with several suggestions. First, he says that some investors may want to consider bitcoin as one component of the bond side of a 60/40 stock/bond portfolio. Since bond yields are near zero or negative, he suggests replacing some of them with gold or “assets that behave like gold.”

He points out that bitcoin does have several risks, including volatility, competitors, and policy intervention. However, he also admits that:

“bitcoin is a legitimate store of value, is scarcer than gold, and comes complete with a potentially exponential demand dynamic.”

As the report suggests, the question now changes from whether you should invest in bitcoin to how much?

Varied crypto allocation suggestions

Other financial experts have also made portfolio allocation suggestions based on the 60/40 model.

Ark Invest CEO Cathie Wood said that she believes bitcoin and other crypto may become a standard part of recommended portfolios for investors.

She posited that cryptocurrencies, like bitcoin, will eventually resemble bonds. Consequently, she believes that the bond portions of these portfolio allocations may finally give way to cryptocurrencies.  

Wood said:

“You think about the traditional 60/40 stock-bond portfolio, but look what’s happening to bonds right now,” she said. “If we are ending a 40-year secular decline in interest rates, that asset class has done its thing. What’s next? We think crypto could be the solution.”

Another allocation suggestion comes from a study performed by Yale economist Aleh Tsyvinski.

According to the study, cryptocurrencies enjoy higher potential returns than other asset types, despite their higher volatility. A portfolio should contain 6% bitcoin to achieve optimal construction, the study says.

Even for bitcoin skeptics, the research suggests at least a bitcoin allocation of 4%. If only for the purpose of diversification, those cautious of cryptocurrencies should have at least 1% in their portfolio.

This conservative amount is suggested by Ric Edelman, founder of Edelman Financial Engines. Replacing one percentage point of the 60% stock allocation with cryptocurrency would give investors the benefit of diversification without risking their portfolio.

“We need to acknowledge that 1% allocation isn’t going to materially harm a client,” he said. “It isn’t going to prevent them from achieving their financial goals and won’t damage their personal finances.”

Edelman lauds virtual currency for diversification, as they have little correlation with other asset classes.

The Black-Litterman Model

Although experts have various opinions of how much bitcoin one should have in their portfolio, how can an average retail investor decide?

Fortunately, there is a model that takes an objective approach while also including investors’ preferences. 

The Black-Litterman Model starts with a neutral, “equilibrium” portfolio. It then provides a formula for increasing holdings based on the investor’s view of the world. It incorporates not only an investor’s growth estimation, but also the confidence in that estimate. These inputs are translated into a specific portfolio allocation.

It starts with the global market portfolio, or all the asset holdings in the world, as the neutral starting point. If bonds occupy 51.98% of the total asset market, stocks 47.03%, and crypto at $2 trillion, 0.99%, then the base portfolio should have a similar allocation.

Next, for any given growth rate in cryptocurrency, the Black-Litterman Model returns the amount an investor should hold in their portfolio. The investor can then specify their conviction level in that assumed growth rate, and the model adjusts accordingly.

As crypto increasingly overshadow investors’ interests in other assets, it is apparently worth considering the Black-Litterman Model among the many tools in determining your optimal crypto investment.

Disclaimer

All the information contained on our website is published in good faith and for general information purposes only. Any action the reader takes upon the information found on our website is strictly at their own risk.

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Nick is a data scientist who teaches economics and communication in Budapest, Hungary, where he received a BA in Political Science and Economics and an MSc in Business Analytics from CEU. He has been writing about cryptocurrency and blockchain technology since 2018, and is intrigued by its potential economic and political usage. He can best be described as an optimistic center-left skeptic.

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BitMEX Executives to Face Trial in March 2022

BitMEX’s former executives Arthur Hayes, Benjamin Delo, and Samuel Reed will face trial in March 28th, 2022.

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The executives of the derivatives trading platform – BitMEX – will face trial in March next year. The money laundering case will come 18 months after charges were first filed. The former members of BitMEX can face up to 5 years in prison and a $250,000 fine if found guilty.

The Trio Heads to Trial

Last year, US officials accused the CEO of the company Arthur Hayes, the co-founder Benjamin Delo, and the chief technology officer Samuel Reed of violating the Bank Secrecy Act. Moreover, the members of BitMEX were served with money-laundering charges.

On May 11th – 18 months after the first accusations against them – New York District Judge John Koeltl set the trial date for March 28th, 2022. Furthermore, Gregory Dwyer – BitMEX’s head of business development – also faces charges but will appear in court separately.

Even though the company’s headquarters are in the Seychelles, the US Department of Justice accused BitMEX of failing to apply anti-money laundering procedures while doing business with US-based customers.

Interestingly enough, the ex-CEO of BitMEX – Arthur Hayes – said that the exotic island was a more convenient place for business as it was much easier to bribe Seychelles’ authorities rather than the US ones. The former executives of the cryptocurrency exchange could face a maximum of five years in prison and a $250,000 fine.


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Where Was Arthur Hayes?

Attorney Jessica Greenwood told the court that Hayes has ”discussed a surrender date of April 6th, 2021 in Hawaii.” She added that ”the plan is to notify the Court in advance of that appearance and discuss logistics” around his submission.

As CryptoPotato reported, even after his remote announcement Hayes continued to reside abroad and explained that he would only visit the United States whenever has to face the trial in New York.

In the end, the former BitMEX CEO indeed turned himself in on April 6th, 2021. However, the officials released him on a $10 million bond pending the future court process.

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Source: https://cryptopotato.com/bitmex-executives-to-face-trial-in-march-2022/

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dotmoovs Raises $840,000 From Strategic Investors and Partners

[Press Release – Tallinn, Estonia, 12th May, 2021] dotmoovs, an NFT platform powered by advanced computer vision algorithms has successfully completed a private funding round of $840,000 from notable investors. Amongst the investors are Moonrock Capital, Morningstar Ventures, Spark Digital Capital, Ascensive Assets, Rarestone, Building Blocks, MarketAcross, AU21 and GBV Capital. The sports industry needs […]

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[Press Release – Tallinn, Estonia, 12th May, 2021]

dotmoovs, an NFT platform powered by advanced computer vision algorithms has successfully completed a private funding round of $840,000 from notable investors. Amongst the investors are Moonrock Capital, Morningstar Ventures, Spark Digital Capital, Ascensive Assets, Rarestone, Building Blocks, MarketAcross, AU21 and GBV Capital.

The sports industry needs a solution for giving everyone a real chance to earn from their skills. dotmoovs is designed to bridge the gap between physical and geographic limitations, assessment of skill and finally – monetisation. Our vision is to build a powerful sports platform where everyone can challenge their friends or any other similar skilled players in the World for a challenge in their favourite sport.

“We are proud to have such notable investors joining us in building the first crypto mobile worldwide sports competitive environment. We know they can boost our growth and provide industry specific insight and knowledge which will be a deciding factor for us” said Ricardo Martins Costa, head of growth of dotmoovs.

“Our vision is a robust platform powered by blockchain and a state-of-the-art AI system that can analyse videos of players performing sports challenges in real-time” Ricardo adds.

“Moonrock Capital and Morningstar Ventures have come together to assist in incubating and bringing the dotmoovs project together. We are grateful and honored by the trust shown by dotmoovs’ team to become their official incubators and lead investors. Working closely with the team for some time now, we are highly impressed with their professionalism, expertise, and what they’ve developed so far. We are very excited to see this ambitious and revolutionary project come to life – combining sports, blockchain, and NFTs with dotmoovs’ vision of growth. The level of their supporting technology is not something we see every day. For these reasons, we are thrilled to be a part of dotmoovs’ journey and helping them achieve their vision.” said Simon Dedic, Managing Partner Moonrock Capital, and Danilo Carlucci, CIO Morningstar Ventures.

About dotmoovs

dotmoovs is the first crypto mobile worldwide competitive environment. The platforms allow users to compete with others around the world just by bringing their skills, ambition, and smartphone. dotmoov’s AI-based video referee will assess their performance in real-time. Powered by blockchain technology, sport competition will enable fair challenges and access to unique digital assets.

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Coinsmart. Beste Bitcoin-Börse in Europa
Source: https://cryptopotato.com/dotmoovs-raises-840000-from-strategic-investors-and-partners/

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Bitcoin Has a Long Way to Go Says Bain Capital’s Chairman

The Chairman of the investment firm Bain Capital believes that BTC is far away from being a viable currency but it could be better than gold.

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Steve Pagliuca – Chairman of Bain Capital – opined that Bitcoin is hard to be seen as a viable currency yet. According to him, the stability of the primary cryptocurrency is not satisfactory and it has a long way to go to be accepted in lots of places.

Additionally, Pagliuca commented on arguably the hottest trend in the crypto space lately – Dogecoin – as he called it a ”prescription for a disaster.”

BTC Is Not a Viable Currency

Steve Pagliuca shared his thoughts on Bitcoin in a recent Bloomberg interview. Bain Capital’s Chairman outlined the potential of the digital asset but alarmed that it is hard to be seen as a viable currency at the moment and is far from receiving mass adoption.

”It’s hard for me to wrap my mind around bitcoin being a viable currency. Bitcoin is going to have to go a long way to go to be accepted in lots of places.”

However, Pagliuca made an interesting comparison between the primary cryptocurrency and gold. In his opinion, the digital asset is actually more efficient than the precious metal as it can be used as a value transferring instrument. Pagliuca opined that when people criticize BTC they should criticize gold too as the value of the yellow metal is based on what people think about it.

The Chairman of Bain Capital surmised that the blockchain technology is ”fantastic” but he also alerted that if BTC keeps its massive invasion eventually it can threaten the stability of the global financial system.


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Steve Pagliuca. Source: Bloomberg
Steve Pagliuca. Source: Bloomberg

DOGE Could Be a Disaster

The crypto community and numerous outsiders have been focused on Dogecoin lately, resulting in a spectacular price surge for the meme token. As such, Pagliuca was also asked about it.

Despite the support and sympathy which Elon Musk and Mark Cuban have shown for the meme coin, Pagliuca shared a highly unfavorable opinion about it:

”Dogecoin seems like a prescription for a disaster. I am the last person who wants to call it valuable. It could be fun to buy DOGE but I wouldn’t bet my savings on it.”

Is Bitcoin Really Similar to Gold?

Steve Pagliuca is not the first prominent name to compare the primary cryptocurrency with the precious metal. The American entrepreneur and billionaire – Mark Cuban – opined on the topic, too.

During a recent interview, Cuban noted that the digital asset together with gold are ”financial religions.” However, he went further by saying that Bitcoin is the better option as it ”enables the transfer of value locally and globally.”

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Coinsmart. Beste Bitcoin-Börse in Europa
Source: https://cryptopotato.com/bitcoin-has-a-long-way-to-go-says-bain-capitals-chairman/

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