Matt Hougan, Global Head of Research at San Francisco-based digital asset management firm, Bitwise Asset Management, has become the latest to weigh in on the topic regarding what fraction of an investor’s portfolio may be allocated to a highly-volatile asset like Bitcoin.
Hougan shared his thoughts in a recent Bitwise webinar where financial advisors looking to make a foray into Bitcoin and digital assets, asked questions to get a clearer understanding of how they can benefit from a BTC allocation to their portfolio especially in light of the current financial crisis.
It is no longer news that Bitcoin was the best performing asset of the last decade, and has once again impressed since the start of the year. Given such a high historical return, one might argue that an investor should be allocating 90-100% of their portfolio to maximize profits.
However, Matt Hougan, who admits to himself having only a little above 5% of his liquid net worth in crypto, suggests that an allocation above that figure could hurt investors since past yields do not guarantee future performance also there is a ‘possibility that Bitcoin fails or thread water for years,’ making a 90% allocation an unexciting allocation.
The concept of ‘rebalancing and volatility harvesting’ is another reason why, according to Hougan, a small allocation to Bitcoin wouldn’t hurt. With a disciplined tactic of buying low and selling high, and regularly rebalancing, the Bitwise official explains that even someone who bought Bitcoin at its all-time high back in December 2017, would still have their overall portfolio in green.
Hougan further highlighted ’emotions and behavior’ as the final reason why investors shouldn’t allocate up to 90% to crypto as massive drops like the 80% dip in 2018 could force them to sell off their holdings at the market bottom.
On the other hand, Hougan added:
Keeping your allocation at just 1-5% helps you tolerate the ups and the downs. It helps you stay with the program. […] Bitcoin is a powerful portfolio stimulus. Even a small allocation can have an enormous impact. So why some people want to go big, for most investors 1-5% is enough.
Meanwhile, Hougan reiterated ‘being excited’ about Bitcoin’s prospect for the rest of the year, especially in light of the government’s unprecedented quantitative easing in the face of the COVID-19 crisis.
Growing institutional involvement, interest from the younger generation, and more precise regulation of market infrastructure, including the prospect of a Bitcoin exchange-traded fund (ETF), are other reasons to be bullish about Bitcoin according to the Bitwise official.