Bitcoin’s bull trend is likely the result of new money coming into the markets. We all know that a limited supply of bitcoin has implications. One of these implications is that new market demand can increase buying pressure on the price. With the current halving of mining rewards the creation of new coins are reduced, which adds to the scarcity. Unlike the parabolic bull market of 2013 the current trend is more stable.
Bitcoin is the oldest and most secure blockchain in the world. After seven years of existence, investors and financial planners are starting to take Bitcoin a little more seriously. Without precedence it was risky for traditional investors to get skin in the game. The main appeal of Bitcoin is that it’s proven to be a long term store of value and uncorrelated asset.
Hedging Through Diversification
The most common long term investment strategy is to hedge through diversification. The best way to do that is to build your portfolio with a mixed correlation of asset classes. Correlation is the price relationship between one asset to another.
There are three main classifications:
- Positive correlation = assets that move together
- Negative correlation = assets that move in opposition
- Uncorrelated = assets that have no price relationship to other assets
Bitcoin as an Uncorrelated Asset
Long term investors are looking at bitcoin because it’s the perfect uncorrelated asset. Bitcoin is an investment that’s completely outside of the traditional markets and has no price correlation to legacy assets.
During the 2009 economic meltdown most portfolios took a severe beating. In the event of another financial disaster, an investment like bitcoin could help offset any losses. It’s also possible that bitcoin could thrive in economic uncertainty with aggressive price gains.
Investors and portfolio managers know it’s difficult to find true uncorrelated assets, which is why they are looking at bitcoin. The biggest problem with owning bitcoin is keeping the private keys secure. Hopefully soon, we’ll see bitcoin packaged in traditional investment vehicles like ETFs. When this happens, I think more portfolios will look for exposure.
Disclaimer: Not meant as financial advice.
