It is no surprise that almost everyone on Wall Street is trying to figure out if they should buy, short, or avoid cryptocurrencies such as Bitcoin, Ethereum, and Litecoin. Over the trailing 12-months, the Bitcoin Investment Trust (GBTC) has gained over 2,000%.
In fact, over the past four years, the Winklevoss Twins turned $11 million into more than $1 billion, and the chairman of the Securities and Exchange Commission just warned investors of the countless risks in virtual currencies, not to mention their environmental footprint.
Cryptocurrency Mania
At ETF Portfolio Management (ETF PM), we see increasing chances of a stock market mega bubble ahead, and we recommend the investable benchmarks for core portfolio diversification. However, we always monitor leading trends, and the historic cryptocurrency mania of 2017 is now too big to ignore.
Investors willing and able to quickly lose 100% of their cryptocurrency value, could easily justify a 0.5% to 1.0% portfolio allocation in the Bitcoin Investment Trust (GBTC). Year-to-date, GBTC has gained over 1,700%, while Litecoin, the fourth largest digital currency, has risen by over 7,000%.
Still, many investors may prefer to invest in Bitcoin through GBTC for the efficiency of owning a somewhat “traditional investment vehicle,” instead of buying Litecoin through Coinbase.
Have A Plan
ETF PM’s strategy for investing in virtual currencies is designed to help our clients participate in their long-term growth potential, while minimizing the risk of material principal loss. Since the volatility in GBTC will be extreme at times, we control risk with a small position size. Investors with a relatively small initial allocation will be far better suited to endure extreme price volatility ahead.
Our initial allocations to GBTC may also grow through add-on investments of a similar size if the initial allocation grows by 300% to 500% quickly. Lastly, we will attempt to minimize risk by liquidating the entire allocation if a client’s loss in GBTC ever exceeds their initial allocation amount.
Bottom Line
Some people are questioning if Satoshi Nakamoto, the creator of Bitcoin, is Elon Musk, or the world’s first potential trillionaire. The virtual currency trend is clearly the investment bubble du jour. Perhaps, this would be a good time to reiterate that past performance can never guarantee future results, and there are countless risks when investing in cryptocurrencies.
All of the above said, Investors should consult their financial advisor before allocating to these instruments, and/or consider a very small allocation with a strict risk control process.
ETF PM has long positions in GBTC.
Contact us to learn more.
