Bitcoin: A Savvy Way Aggressive Investors Grow Investment Portfolio Returns

Investors are rational agents trying to optimize wealth and minimize risk.

Due to the impact of inflation on investments, many young, wealthy investors are looking beyond the stock market for higher returns. The rapid collapse of Silicon Valley, Signature, and Silvergate banks highlights the fragility of the global banking sector and unfavorable market conditions. As a result, Bitcoin has become a place where people invest amidst bank failures and high inflation. According to a recent survey, 40% of investors disclosed having 11% or more of their investments in Bitcoin.

Such investment commitments are, however, contrary to financial advisers’ recommendation that crypto clients should have up to 1% of their assets in cryptocurrencies and the remaining 99% in more traditional assets.

With a strong risk appetite, these Bitcoin investors manage to beat inflation. Ordinary investors looking for ways to succeed in investments can learn many things from these Bitcoin investors.

Bitcoin as a Diversifier                           

Many investors feel the ripple effects of the global currency crisis caused by governments printing money and high-interest rates. As a result, these investors are searching for alternative investment opportunities.

Investors with strong risk tolerance are turning to Bitcoin. Many of these investors allocate between 5% -10% of Bitcoin into their portfolios to diversify their traditional investments (publicly traded stocks, bonds, and cash).

Bitcoin has emerged as a potential alternative investment as it offers high returns, which are not correlated to that of stocks and bonds. Investment companies and professionals recommend the addition of a small percentage of high-risk and potentially high-reward assets (like Bitcoin) into an investment portfolio.

The concept functions like this – a small percentage of Bitcoin allocation (from 5 to 10 percent) into the conventional assets potentially offers high returns, with minimal impacts on a portfolio in case volatility becomes too great.

Bitcoin as a hedge against inflation                                 

When inflation affects fiat-based economies, professional investors and even ordinary people look for investments that work as a hedge.

This has influenced people to put their cash in store of value investments like stocks, real estate, gold, and now Bitcoin. However, conventional asset classes like gold, stocks, and real estate are unreliable hedges as centralized authorities control them, making them vulnerable to pressures and prejudices.

Several investors see Bitcoin as an effective inflation hedging instrument because the supply is permanently fixed, unlike those of fiat currencies, which central banks can expand indefinitely. Bitcoin has managed to retain its value and continue growing. As a result, many investors use it as a hedge against inflation and an alternative to traditional value stores like gold or other metals.

Statistics show that Bitcoin has worked well against inflation, much better than assets like stocks, real estate, gold, etc. Bitcoin’s underlying strengths, like decentralization and limited supply, propel the flagship cryptocurrency to a unique position as an asset that works well against inflation.

Bitcoin creates higher risk-adjusted returns

Most people put their money into well-known assets (like stocks, bonds, and cash), but market fluctuations delay the returns of such investments for many years.

Many clients mitigate this issue by diversifying their financial portfolios and utilizing alternative investments. They recognize Bitcoin as the best alternative investment to boost returns in a 60/40 portfolio.

Bitcoin returns have been substantial. For example, adding 2.5% Bitcoin to a conventional portfolio consisting of 60% stocks and 40% bonds would contribute positively to the diversified portfolio’s three-year cumulative and risk-adjusted returns by 13% - 21%. Furthermore, adding 5% Bitcoin to the classic portfolio will likely increase annual returns by a higher percentage, and investors won’t have to deal with substantial volatility.

When adding Bitcoin to a diversified portfolio, investors should consider timing, rebalancing tactics, and allocation size. Practice shows that the longer an investor holds his assets, the higher the returns. Holding a period exceeding two years improves the portfolio’s cumulative and annualized returns.

Regular rebalancing is also an important consideration. Investors who decide to add a Bitcoin allocation to their regular 60/40 should ensure to plan out quarterly rebalancing strategies.