Skeptics from all over the world believe that Bitcoin and other cryptocurrencies are too risky and volatile to be a good investment. However, more and more people are getting interested in digital finances and including cryptocurrencies in their investment portfolios. From a technological point of view, Bitcoin is one of the best-protected systems. Amy Arnott, Morningstar’s portfolio strategist, says that cryptocurrencies deserve a place in a diversified investment portfolio.
“Crypto is definitely becoming more established as a separate asset class and moving more into the investment mainstream. It’s definitely something that long-term investors should consider if they’re more risk tolerant.”
At the same time, the strategist reiterated the standard rule according to which the share of cryptocurrency should not exceed 2% of the overall investment portfolio. The need for caution arises because of the high volatility of cryptocurrencies: investors need to keep a closer eye on their crypto assets than on traditional investment tools.
The global cryptocurrency market is constantly growing. It has already reached over 2.6 trillion U.S. dollars. Although Bitcoin is volatile, in some cases it has shown a less close correlation with traditional assets such as stocks and bonds and sold off less with other risky assets during a market decline.
Arnott recommends investors to buy crypto directly through a cryptocurrency exchange or platform. Isaiah Jackson, the author of a best-selling book “Bitcoin & Black America,” states that Bitcoin is and will remain a long-term asset.
“If you want to be a part of it, you have to think long-term.”
Jackson notes that any market is volatile to some extent. An investor cannot get rich by simply buying shares — it is helpful to be patient and wait. In the case of long-term investment, the volatility of assets does not affect the results.
Arnott compared cryptocurrency investing to the Internet boom of the 1990s. In fact, back then it was enough to set up a website to drive a company’s shares higher.
“Consider it a growth asset and really a play on the long-term shift toward digital money and the ongoing revolution in the financial technology landscape. You’re not directly investing in the underlying technology, but you are getting indirect exposure to it,” she explained.
The strategist referred to the development of payment services, blockchain, NFTs, and many other new financial technologies that have appeared in recent years. In the global market of payments processing solutions, crypto exchange Bakkt (BKKT) announced this week that it has partnered up with Mastercard (MA). Together, they will make crypto payments easier by offering cryptocurrency debit and credit cards.
“We want to be able to provide the ability to be able to use cryptocurrency in an everyday transaction. The Mastercard partnership includes the ability for us to be able to deliver crypto rewards, another way to gain an asset holding in this space in a fairly easy way,” Gavin Michael, the CEO of Bakkt, said in his interview to Yahoo Finance.>
Cryptocurrency investing has become more attractive to many users last week when the SEC approved the first Bitcoin ETF (exchange-traded fund). However, even though the ETF has provided investors with better exposure, it will not necessarily become the best tool for investing.
Arnott notes that even though the ETFs offer better transparency and can be easily purchased using an existing securities account, they might not always correctly track the Bitcoin price. As a result, investors do not use the full potential of the underlying assets.
The ETFs invest in a front-month futures contract. After the rollover, the ETFs may have to pay a higher price for the futures. According to Arnott’s assessment, the profit may decrease by 5–10% each year. Because of that, ETFs might be a less profitable option than purchasing the actual underlying assets through cryptocurrency exchanges.
“I think we will eventually see a crypto ETF that tracks the spot price. But at this point, if you’re looking to add crypto exposure to your portfolio, you’re probably better off buying it directly through a crypto exchange or platform,” Arnott commented.
Bakkt provided options for trading in Bitcoin futures even before the arrival of ETFs. Gavin Michael thinks that in the end, ETFs will be able to invest in the cryptocurrency itself, instead of its futures contracts. In his opinion, Bitcoin futures exchange-traded funds will help to tamp down the volatility in the long run.
“We expect evolution in this space to move away from cash-settled prices through the futures contracts into physically delivered contracts, as has been the norm for other ETFs that have tracked based on a commodity,” he commented.
Based on the article by Yahoo Finance