As cryptocurrency is rapidly going mainstream, many conservative investors – who are passively buying and holding low-cost ETFs and dollar-cost averaging in an online brokerage account – are equal parts crypto curious and crypto cautious.
But cryptocurrencies, like with any asset class, can have a place in a well-diversified portfolio built for the long term. The principles of passive investing aren’t unique to globally diversified index funds, and allocating a percentage of your holdings (even if it’s just one or five percent) into a growing asset class with a $1.7 trillion market cap and increasing acceptance from the financial establishment, is something conservative investors may want to consider.
Here are five reasons why conservative investors should look into cryptocurrencies.
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The role of risk and volatility
The concept of risk is often misunderstood, and being a quote-unquote conservative investor can be conflated with avoiding high-volatility assets. But, that’s arguably not the case.
Conservative, passive investors believe in mitigating risk by buying-and-holding assets, building wealth gradually, diversifying, understanding their time horizons, and weathering short-term market fluctuations for long-term growth.
It’s the reason why passive investors flock to all-equity funds like the S&P500 and VEQT, despite the fact they can see huge day-to-day swings. A one-day 12% drop, like what was experienced on March 16, 2020, means nothing for the conservative passive investor who knows total 10-year market returns have hovered around 199%.
It’s these same principles of buying-and-holding for the long-term that investors – who are willing to embrace crypto’s volatility and view it as a natural consequence of its infancy as an asset class – can apply to Bitcoin and altcoins. For context, at the time of writing this, the value of Bitcoin is up 2.75% over the past 24 hours, increased 87% year-to-date, and has climbed roughly 12,000% over the past 5 years.
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Cryptocurrency is being accepted by the establishment
Cryptocurrency has gone mainstream, gaining increased widespread acceptance from institutional investors, retail investors, and regulators alike.
In 2021 alone, the Ontario Securities Commission gave its go-ahead to launch the world’s first Bitcoin ETF, Tesla purchased $1.5 billion in Bitcoin to diversify its cash holdings, and JPMorgan Chase, North America’s biggest bank, now endorses investors should allocate a percentage of their portfolio to cryptocurrency. Meanwhile, Paypal, Visa, and Mastercard are all making moves to facilitate crypto transactions.
Rick Rieder of BlackRock – one of the largest providers of ETFs in the world, including the all-in-one ETF XEQT lauded by passive investors – has also said “cryptocurrency is here to stay” and “ it is durable.” Meanwhile, the capital market’s division of RBC – one of Canada’s big five banks – even issued a report suggesting Apple should follow in the footsteps of Tesla and buy Bitcoin holdings.
Even billionaire investor and television personality, Kevin O’Leary, who called Bitcoin “a giant nothingburger” back in 2019 has completely reversed his stance on crypto, allocating 3% of his portfolio into Bitcoin.
All these factors highlight how crypto is at an inflection point and is viewed as a legitimate long-term investment by some of the world’s most prominent financial firms, investors, and analysts.
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Crypto can help improve diversification
Diversification is a key tenet of conservative, passive, long-term investing. The reason why can be perfectly summed up by the old adage “don’t put all your eggs in one basket.”
Every industry goes through bouts of ups and downs, and diversification helps ensure you’re not overly exposed to the volatility of one particular sector. The dot-com bubble of nearly three decades ago is perhaps the best lesson in why diversification is so important. If your portfolio was heavily weighted towards internet companies like Cisco Systems in the late 1990’s – as many investors’ holdings were – you would’ve lost up to 70% in value in just 12 months and never fully rebounded even today, 30 years later.
Buying cryptocurrency is yet another means of diversifying your portfolio, exposing you to an entirely new asset class. Another added advantage of cryptocurrency is you can buy Bitcoin in addition to different altcoins – like Ethereum, Cardano, and more – employing further diversification within your crypto holdings.
There’s also the argument that, when it comes to diversification, cryptocurrency has a unique edge.
Crypto like Bitcoin has been dubbed an uncorrelated asset by everyone from billionaire venture capitalist Chamat Palipitiya to multinational financial services firm Fidelity Investments. An uncorrelated asset doesn’t follow predictable patterns of growth and operates mostly independently from other assets like stocks, real estate, or bonds. With a degree of separation from traditional sectors, holding Bitcoin or altcoins can arguably help improve diversification by acting as a hedge and mitigating losses when the broader economy is down.
According to Fidelity Investments, “Bitcoin’s correlation to other assets from January 2015 to September 2020 is an average of 0.11, indicating there is almost no relationship between the returns of Bitcoin and other assets.”
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Understand your time horizons
Peter Lynch, the legendary investor whose Magellan mutual fund trounced stock market benchmarks over decades, put it best when he said “if you need the money in one or two years, you shouldn’t be buying stocks. You should think about being in a money market fund.”
The message conservative investors should take away is clear: if you’re looking to buy, hold, and earn long-term value with cryptocurrencies – as you do with stocks – you have to allocate your money appropriately based on your time horizons.
Any cash you need for the short-term, whether it’s for an upcoming home renovation or funds set aside for emergencies, should be saved and safely stored in a high interest savings account, GIC or another low-risk investment vehicle. Meanwhile, money you have available to invest for the future over sustained periods of time (ideally, at least 5 years) can be used to purchase a mix of Bitcoin, altcoins, stocks, or ETFs, where you can ride short-term volatility on the way to higher returns down the line.
The last thing you want is to liquidate your crypto and stock portfolio and potentially compromise on long-term investment gains because you’re cash strapped and suddenly need money to cover for a car repair.
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Crypto can be a utility
One knock against Bitcoin from some in the investing community is it’s simply a store of value and doesn’t provide a utility. While that’s not inherently unique to Bitcoin, hurts its prospects as an investment, or should really serve to deter conservative investors (many of whom embrace gold), it’s important to recognize not all cryptocurrencies are the same.
Ethereum, the second-most popular cryptocurrency behind Bitcoin, does provide a utility that allows developers to create applications that serve a purpose (whether that’s fulfilling financial contracts or facilitating the exchange of property, content, or anything of value). Dutch bank ING, Microsoft, and video game giant Ubisoft have all employed Ethereum’s technology to at least some degree already. Blockchain, which is the technology on which all crypto is built on, also serves a purpose as a decentralized database that tracks transactions.
The Bottom Line
Cryptocurrency – like stocks, bonds, real estate, and gold – is an asset class that can fit in almost every portfolio. And while cryptocurrency is volatile (and some argue speculative) its $1.7 trillion market cap and increasing mainstream adoption suggest it’s here to stay.
Disclaimer: This blog post is purely informational and opinion-based, and does not serve as financial advice.
– Written by Hyder Owainati
