🩻 Part 1 of Hedging Your Portfolio: Cryptocurrencies
A Masterclass from The Pragmatic Investor
[Jack’s note: This guy knows much more than I do about Cryptocurrencies]
TL;DR
President Donald Trump announced his plans for a Strategic Crypto Reserve on Monday, sparking a huge crypto rally. The US President will also be hosting a Crypto Summit at The White House.
As cryptocurrencies continue to mature and enter the mainstream, they are becoming an increasingly attractive option for investors looking to diversify their portfolios.
While still relatively young compared to traditional assets, the potential for high returns and a hedge against inflation has sparked interest from institutional and retail investors alike.
In this article, we will explore the fundamentals of cryptocurrencies, the case for Bitcoin, the role of altcoins, the outlook for Bitcoin, and practical advice for including Bitcoin in a diversified portfolio.
Expect To Learn
What Crypto Is Exactly
Is Bitcoin Digital Gold?
Altcoins; Are They Worth It?
Bitcoin Outlook And Price Prediction
How To Gain Exposure To Bitcoin
But first, a little bit about me, The Pragmatic Investor
An approach that assesses the truth of meaning of theories or beliefs in terms of the success of their practical application.
That is Pragmatism, and it guides my investment philosophy.
Through many years of analyzing markets, I have found this is what works.
The Pragmatic Investor sticks to what works. The problem is there are thousands of different strategies that CAN work for certain people.
But simplicity is key, and that is why I have narrowed down my investing ethos into three key ideas, which combined create what I like to call, The Pragmatic Investing Pyramid.
Macro, Fundamentals and Technical.
This is the three-pronged approach that has helped me beat markets over the seven years.
For long-term investing, there’s nothing better than understanding business cycles, macroeconomic trends and geopolitics.
On the other hand, when it comes to short-term moves in markets, the best tool we have is technical analysis.
And not just a specific form of technical analysis but a robust set of tools that can all work in conjunction to help us find great setups.
I actually recently designed my own algorithm, you can see it here:
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What is Crypto?
Cryptocurrencies are digital or virtual assets that leverage blockchain technology to facilitate secure and transparent peer-to-peer transactions. Unlike traditional currencies issued by central banks, cryptocurrencies operate on a decentralised ledger, ensuring that transactions are immutable and resistant to censorship.
Cryptocurrencies can broadly be classified into two categories: Bitcoin and altcoins. While Bitcoin serves as a store of value and a potential hedge against inflation, altcoins offer various use cases, including smart contracts, decentralised finance (DeFi), and privacy solutions. Understanding the distinction between Bitcoin and altcoins is crucial for investors considering exposure to this asset class.
The Case for Bitcoin
Bitcoin has often been compared to gold due to its limited supply of 21 million coins and its appeal as a hedge against inflation.
Its decentralised nature means it is not subject to government control, making it an attractive option for those seeking an asset that is less correlated to traditional markets.
Just for reference, consider that the “amount of money in circulation”, what economists call M2, has increased sharply in the last 50 years as governments print more money to fund deficits.
This has effectively eroded the purchasing power of the US currency, which is why sound alternatives, like Bitcoin, have appeared.
Institutional adoption has accelerated in recent years, with companies such as MicroStrategy, Tesla, and numerous hedge funds allocating a portion of their portfolios to Bitcoin. Additionally, regulatory clarity in countries like the United States and the growing acceptance of Bitcoin ETFs have bolstered its legitimacy as an investment.
Bitcoin's security is underpinned by its proof-of-work consensus mechanism, which makes it incredibly difficult to alter past transactions. This security, combined with increasing adoption and limited supply, creates a compelling case for including Bitcoin in a diversified portfolio as a hedge against inflation and economic uncertainty.
Altcoins
While Bitcoin commands the lion's share of the cryptocurrency market, altcoins have emerged to address various use cases and limitations of Bitcoin.
President Trump, in fact, named four Altcoins that would also be included in the Strategic Reserve, so it’s worth talking about them here.
Ethereum (ETH): Known for its smart contract capabilities, Ethereum has become the backbone of the decentralised finance (DeFi) ecosystem and non-fungible tokens (NFTs). Its ongoing transition to Ethereum 2.0, which replaces proof-of-work with proof-of-stake, aims to enhance scalability and reduce environmental impact.
Solana (SOL): Positioned as a high-performance blockchain, Solana offers faster transaction speeds and lower fees compared to Ethereum, making it a popular choice for DeFi and NFT projects.
Cardano (ADA): Focused on security and scalability, Cardano employs a proof-of-stake consensus mechanism and aims to provide a more sustainable and secure infrastructure for decentralised applications (dApps).
Ripple (XRP): XRP’s primary use case is to act as a bridge currency for international payments, making it particularly attractive to banks and financial institutions aiming to streamline and reduce the cost of remittances and cross-border transfers.
Altcoins are more risky than Bitcoin. If the latter is digital gold, then Altcoins are more like startups. Some will no doubt provide great returns, but a lot will also likely not be around in 10 years.
Outlook For Bitcoin; How High Can We Go?
The outlook for Bitcoin remains cautiously optimistic. Several factors could drive its price upward in the coming years:
Institutional Adoption: As more institutional investors allocate funds to Bitcoin, demand is likely to outpace supply, pushing prices higher.
Halving Cycles: Bitcoin's halving events, which reduce the block reward by half every four years, have historically preceded major price rallies due to the resulting supply shock.
Macroeconomic Factors: Persistently high inflation and concerns about fiat currency devaluation could strengthen Bitcoin's appeal as a digital gold.
We’ve seen inflation get out of hand in the last few years, and this is a worrying trend that investors have to be aware of, especially as the Federal deficit keeps climbing.
Regulatory Clarity: Greater regulatory clarity, particularly in major markets like the United States and the European Union, could attract a new wave of institutional and retail investors.
However, regulatory risks and market volatility remain significant concerns. Investors should approach Bitcoin from a long-term perspective and with a clear understanding of its risks and potential rewards.
Cathie Wood, from ARK Invest believes Bitcoin could be worth over $1 million by 2030
While this is an optimistic scenario, I do agree that Bitcoin has a much more important role to play in the future of finance, and this will be reflected in the future.
As companies, institutions and even governments begin to see its utility, trillions will flow into this asset.
Including Bitcoin in a Diversified Portfolio
Including Bitcoin in a diversified portfolio requires careful consideration of risk tolerance and investment goals.
Financial advisors often recommend allocating between 1% to 5% of a portfolio to Bitcoin, depending on the investor's risk profile. A small allocation can offer meaningful upside potential while minimising downside risk.
Due to Bitcoin's low correlation with traditional assets like stocks and bonds, adding it to a portfolio can enhance diversification and potentially improve risk-adjusted returns. Rebalancing periodically is essential to manage risk, especially given Bitcoin's volatility.
For investors concerned about the volatility of Bitcoin, a strategy known as dollar-cost averaging (DCA) can be effective. DCA involves investing a fixed amount at regular intervals, reducing the impact of short-term price swings.
Buying and Storing Bitcoin
Acquiring Bitcoin has become more accessible with the proliferation of cryptocurrency exchanges such as Coinbase, Binance, and Kraken.
There are three main ways to buy Bitcoin and other crypot assets.
Centralized Exchanges
Investors can purchase Bitcoin directly through these platforms using fiat currencies like USD, GBP, or EUR. The process is relatively simple, akin to opening a brokerage account.
From these exchanges, it’s easy to purchase a lot of different products, and you can even operate with leverage and “stake” your crypto.
But as we say in crypto, not your keys, not your crypto.
Digital Wallets
Security is a critical consideration. Storing Bitcoin on exchanges exposes investors to risks such as hacking and insolvency.
This is why some investors choose to hold crypto in a secure crypto wallet.
However, this requires a certain level of expertise and it also means investors must remember their seed phrase.
A seed phrase is a sequence of 12–24 words that serves as a master key to access and recover a cryptocurrency wallet.
Bitcoin ETFs
Perhaps the simplest way to gain exposure to crypto is ETFs.
Americans can gain exposure to Bitcoin through exchange-traded funds (ETFs) such as the ProShares Bitcoin Strategy ETF (BITO) and Valkyrie Bitcoin Strategy ETF (BTF), which track Bitcoin futures rather than spot prices. These are offered by most major banks and brokerages.
In Europe, investors have access to spot-based Bitcoin ETFs, including the 21Shares Bitcoin ETP (ABTC) and WisdomTree Bitcoin ETP (BTCW), which are listed on exchanges like the Deutsche Börse and SIX Swiss Exchange.
These European products hold actual Bitcoin, offering direct price exposure. U.S. ETFs focus on futures due to the SEC’s restrictions on spot-based products.
ETFs as the ones listed above can be an easy, secure and reliable way to gain exposure to Bitcoin and other digital assets, especially for those just getting started. The only downside is the fees, though these can be quite low.
Conclusion
All in all, there's a strong case to be made here to own Bitcoin. It’s a hedge against currency devaluation, a secure alternative to currency that can be easily kept and transferred and an asset that can help round out your portfolio if used correctly.
Cryptocurrency has been around for a while, but we are just beginning to scratch the surface of what it can do, with companies, countries and institutions now slowly beginning to adopt it.
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