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Besides Bill Gates and a few other IT entrepreneurs there probably aren’t many computer programmers worth hundreds of millions of euros. I read in my newspaper about one: Stefan Thomas, a German programmer living in San Francisco. He has a hard drive with bitcoins worth over 180 million euros. But he has a problem: he’s forgotten the password and so can’t access his fortune.
After bitcoin’s price more than tripled in 2020, going on to fresh highs in January 2021, the stories of lost bitcoin millionaires like Thomas are making the newspapers. At those moments it is easy to forget that, due to bitcoin’s volatility, for every bitcoin millionaire there are numerous investors who lost money on their crypto investments. Bitcoin is an asset class with which you may lose the full amount of capital invested. Many of today’s bitcoin millionaires are early, speculative adopters. More recently, though, bitcoin has gained popularity with cautious investors seeing it as a digital gold – a digital store of value in an age of uncertainty.
Witness MicroStrategy, a US public company, that invested its entire corporate treasury in bitcoin last summer. Then, in October, PayPal opened up its platform for buying and selling.
Keen to give investors a regulated chance to access bitcoin, VanEck launched a bitcoin strategy in November, trading on the regulated part of Deutsche Boerse Xetra. One of the first collateralized bitcoin strategies, this is an important stepping stone in the cryptocurrency’s development.
2020’s events build on those from Bitcoin’s launch in 2009, suggesting that it is increasingly viewed as a long-term store of value. While its scale remains relatively small, with a total market cap at around USD 540 billion (as of 31/12/2020), bitcoin’s capitalization has grown in comparison to gold’s.
Above all, investors value bitcoin for its scarcity. It will be issued in decreasing amounts until the supply reaches 21 million, at which point issuance stops. Similar to gold, this is an esteemed quality when central banks are printing money at unprecedented rates as they seek to support locked down economies.
Scarcity has driven bitcoin’s extraordinary price rise, but its role in an investment portfolio also arises from the fact its price tends to move independently of equities and bonds. This means a small allocation to bitcoin could potentially improve the long-term risk-adjusted return of a diversified portfolio, typically holding 60% equities and 40% bonds. Moving 3% into bitcoin would result in an allocation of 58.5% equity, 38.5% bonds and 3% bitcoin. Over the period from the beginning of 2012 to the end of 2020, its annualized return would have been 15.7%, which compares with 10.4% for the standard 60/40 equity/bond portfolio (see illustration). Be aware that these are historical numbers and therefore not a reliable indicator for future results.
Also note that we are only referring to a small allocation of a broadly diversified portfolio – bitcoin is highly volatile, so it’s best to be prudent. Diversification does not ensure a profit or protect against a loss in a declining market.
Source: VanEck. Data for the period 31/1/2012 – 31/12/2020. Past performance is no reliable indicator for future performance.
In the spirit of full disclosure, I should admit that I was a bitcoin sceptic but have been converted in the past two years.
It’s hard not to feel sorry for bitcoin’s lost millionaires, but if they do find their keys they might want to sell the bitcoin and reinvest in our strategy. That way they can move from being theoretical digital millionaires to the real thing, locking in their huge gains in a way that is safe and transparent, if a little less exciting than the crypto-currency’s cypher punk roots!
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