Whether Bitcoin is a recommended investment option has been a matter of debate among market analysts and economists. While some analysts view Bitcoin as a good investment to include in one’s portfolio, others believe it poses great risks to the asset’s holders. In a recent report, The Economist analyzed the opportunity offered by Bitcoin despite its high volatility. The report cited an article written by Harry Markowitz in 1952 and published in the Journal of Finance. Markowitz won the Nobel Prize in 1990 for his article. The study formed the basis of “modern portfolio theory”. Markowitz wrote at the time:
“DIVERSIONATION is both observable and logical; A code of conduct that does not imply the superiority of diversification should be rejected as both a hypothesis and a principle.”
Bitcoin; an integral part of the investment portfolio
The article discussed both risk-free and highly volatile assets. Therefore, one asset remains to fill the loss when the other asset fails. Meanwhile, the return is not interrupted. For some assets like Bitcoin, risk may not be the most important thing to worry about, according to Markowitz. Instead, what makes Bitcoin an integral part of an investment portfolio is its volatile nature. The author’s statement supports the popular saying “the higher the risk, the better the return”. At the same time, the less risk an asset has, the lower its returns.
For example, the annual yield of bonds is around 1-5%. Sometimes, the returns are even lower. This is because bonds are relatively safe assets. For this reason, investors seeking higher returns on their investments turn to volatile assets such as Bitcoin.
Although Bitcoin is extremely volatile, the crypto asset is an excellent example of modern portfolio theory. BTC is a vital asset for investors and has reliable returns. Although the cryptocurrency has recorded high drops over time, it remains a well-performing asset.
Also, the theory explains the properties of a portfolio. According to theory, a portfolio should contain a small percentage of volatile assets.
The Economist’s report also referred to the investment strategy employed by hedge fund manager Paul Tudor Jones. Earlier this year, Jones revealed that 5 percent of his entire investment is in Bitcoin. As seasoned investors, it’s safe to say that Bitcoin should be part of an investment portfolio. Also, the report explained that 1-5% of the total value of a balanced portfolio should be in Bitcoin.
Finally, The Economist noted that there is no specific factor that feeds Bitcoin’s returns.
Disclaimer: What is written here is not investment advice. Cryptocurrency investments are high-risk investments. Every investment decision is under the individual’s own responsibility. Finally, Koinfinans and the author of this content cannot be held responsible for personal investment decisions.