Bitcoin is a decentralized form of digital cash that eliminates the need for intermediaries such as banks and governments. The system emerged in the aftermath of the 2008–09 financial crisis, when trust in the existing monetary system was seriously eroded. It was created as a form of open-source technology and was intended to be used as an alternative to traditional cash.
An investment of $100 USD in bitcoin has outperformed an equal investment of $100 USD in some of the best-performing equities over a decade.
The outsized returns experienced by bitcoin since its inception have come with extremely high volatility. Of all the major asset classes, bitcoin has displayed by far the most volatility, exceeding over 200% in its early years. Since then, the trend has been towards lower volatility, generally between 20% and 40%, albeit with occasional spikes outside of this range. As an example, this compares to single-digit volatility in US equities.
Risk Adjusted Returns Bitcoin’s outperformance of all other asset classes narrows considerably when a risk-adjusted rate of return measure, such as the Sharpe ratio, is used. Nonetheless bitcoin’s Sharpe ratio has, on average, slightly exceeded that of all other asset classes. Bitcoin’s Sharpe ratio has generally been in the two-to three per cent range since 2015. In comparison, US equities have seen Sharpe ratios in the one-to-three per cent range.
Can we expect bitcoin’s growth to continue at the same pace? What is the value of Bitcoin?
Bitcoin’s value is derived from its use as a medium of exchange (its intrinsic value) and also as a store of value (its monetary value). Bitcoin is recently being more seriously considered as a separate asset class that provides diversification benefits to a traditional portfolio of stocks and bonds. The unique characteristics of Bitcoin enable the disruption of money, gold, store of value, and payments and remittances. As financial services transition towards digital platforms, it makes sense that interest in Bitcoin is growing. Some investors see bitcoins, perhaps inaccurately, as “digital gold”.
Bitcoin’s monetary value is the primary driver behind investor interest and overall value.
The growth of Bitcoin has increased globally, especially in parts of the world where currency has been unstable. One example is Zimbabwe, where there are multiple currencies, along with hyperinflation and price fluctuations. Another is Venezuela, which has experienced hyperinflation for years, and where capital controls restrict the ability to obtain foreign currencies.
Why is Bitcoin a diversification tool for your portfolio?
Bitcoin has extreme low correlation to other asset classes, in particular, to equities and fixed income making it a unique diversified investment tool.
How to get exposed to Bitcoin and tech stocks without the risk?
If you’re bullish on Bitcoin, you can express that view through the CI Galaxy Bitcoin ETF (BTCX), the third bitcoin ETF to be launched on the Toronto Stock Exchange. Like the competing Canadian ETFs that launched before (BTCC and EBIT), BTCX offers exposure to bitcoin held in cold storage. BTCX’s has a category-low expense ratio of 0.40%, undercutting the 1% fee for BTCC and the 0.75% fee for EBIT.
If you’re bullish on tech, you can express that view through the Fidelity MSCI Information Technology Index ETF (NYSEMKT:FTEC). The benefit of investment here is that, for an extremely low annual fee (MER of 0.08), the fund provides a basket of tech companies weighted toward top-tier names like Apple and Microsoft. While this fund probably shouldn’t be a core holding, it would be a safe bet to allocate 5% to 10% of your education savings portfolio to it for a decade or two. The fund is also a prudent choice for those who are interested in tech but don’t want their funds to become ensnared in the hype of day trading or the lure of headline-grabbing stocks.