Should Bitcoin be a part of a Diversified Portfolio?

Regardless of what you might think of Bitcoin as an investment, it is hard to ignore its breathtaking performance over the last several years. Launched initially as an alternative currency to hedge against economic crises, Bitcoin has become the technological darling of speculators looking to cash in on its meteoric rise. The keyword in the last sentence is "speculators" because Bitcoin is not for the faint at heart. Just in the previous year, Bitcoin’s price has swung by more than $2,000 in just a matter of days -- $1,000 down, then $1,000 up. Although the current trajectory of Bitcoin’s price is definitely up, there’s just too much uncertainty in its future to warrant it taking up more than a skinny slice of an investment portfolio – a slice so thin that, if it disappeared tomorrow, it wouldn’t bother you.

Inherent Risks in Bitcoin

Currently, there are two significant problems with investing in Bitcoin. First, it is not regulated like other currencies. While that is the main point of Bitcoin – not to be regulated by bureaucracies – it is like trading a currency in the Wild West; pretty much anything goes. The fact that it is not backed by anything tangible, like gold or the good faith of a government, leaves its price open to interpretation based on its perceived value. That is a very rocky foundation.

Second, the process for buying and selling bitcoins is cumbersome. It is not traded on any public exchange, which means it is not very liquid. That is the main reason behind its volatility and wild swings. You could have a $1,000 gain in the value of a Bitcoin, but, by the time you are able to sell it, the price could drop by $500.

Is Bitcoin Better with ETFs?

As you might expect, the next big move for bitcoin investing is coming in the form of exchange-traded notes (ETN) and exchange-traded funds (ETF), and, for smaller investors, they might be the ideal way to own bitcoin in their portfolios. They are easier to buy and sell on the stock exchange. However, because their trading volume is still relatively low, you could experience liquidity problems during any massive selloff.

Right now, two bitcoin ETNs are available for trade on the Nasdaq OMX in Sweden – Bitcoin Tracker One (COINXBT:SS) and Bitcoin Tracker EUR (COINXBE:SS). Both provide investors with access to the returns of bitcoin. The Bitcoin Tracker One is denominated in Swedish Krona, while the Bitcoin Tracker EUR is denominated in euros. Both charge a 2.5 percent annual management fee.

In November 2020, New York-based investment management firm VanEck launched a bitcoin ETN – VanEck Vectors Bitcoin ETN – that trades on the Deutsche Boerse Xetra exchange.

Currently, there are no bitcoin ETFs available in the United States, though the Bitcoin Investment Trust, which is a company, not an ETF or ETN, trades on the NASDAQ exchange. So far, the Securities and Exchange Commission (SEC) has rejected several proposals to launch bitcoin ETFs, citing the fact that it is an unregulated market and it is still too new. Since then, the Commodities Futures Trading Commission has authorized bitcoin packaging into derivatives products, which can trade freely on the futures exchanges. That would place bitcoin in a regulated environment, which might gain approval from the SEC. Market observers now see a much higher chance of launching several bitcoin ETFs in the U.S. by the end of 2017.

Back to the question of whether investors should own bitcoin in their portfolio – bitcoin should be considered speculative at best. No one knows for certain whether bitcoin is in a massive bubble, ready for a significant correction, or on the verge of another 5,000% gain. Most certainly, no one knows its real value. If you want to own bitcoin, best to do it through an ETN or ETF with a small allocation, you can afford to lose.