But Do You Really Need Bitcoin in Your Portfolio?

We might very well be sitting here in 2050 with Bitcoin (CRYPTO: BTC) as the world’s predominant currency, all the naysayers having been silenced decades earlier. But we don’t hear enough about the other future for Bitcoin, which involves a dark, cold, never-ending crypto winter.

Bitcoin’s potential has been well documented. But do you really need it in your portfolio? Here, we’ll go over some of the considerations you might ponder before adding it to your list of investments.

Bitcoin is a currency

The delicate issue for some (and perhaps rightly so) is Bitcoin being deemed an investment. It doesn’t have many of the hallmarks you look for in an investment: It reflects no underlying business, pays no dividend, and doesn’t have much in the way of fundamental value.

In the same vein, Bitcoin’s extreme volatility doesn’t bode well for it as a store of value. It does seem a little odd to call Bitcoin a store of value when its value whipsaws up and down nearly every day.

Make no mistake: Bitcoin is a currency. It may be a digital alternative currency, but it is a currency nonetheless. If you don’t have the appetite to invest in other currencies, like the British pound or the Russian ruble, you might ask yourself why Bitcoin is any different.

Bitcoin harms the environment

In the midst of a global climate crisis, adding Bitcoin to the world’s portfolio is a questionable decision at best. Both its mining and transactions consume an enormous amount of energy. In fact, a single Bitcoin transaction has been said to take up as much energy as the average American household uses in an entire month.

This is probably more a philosophical argument than anything else, but even if Bitcoin ends up exploding in value, why is it so important that we be a part of something that promotes existential risk on this planet? It might make some people very rich, but it’s fair to be concerned that we have a small number of rich people on a planet that’s increasingly uninhabitable to the large majority.

In a world where we really need to be doing everything we can to minimize our impact to the planet, to continue to use Bitcoin in many ways feels like we’re losing the plot. Our incessant thirst for a more dynamic and robust economy might not be worth the environmental damage.

Image source: Getty Images.

Bitcoin and portfolio risk

If we’ve learned one thing since the onset of the pandemic, it’s that life is insanely fragile, and it can be altered at any time for any reason — or no reason. At the same time, we work very hard for our money. With that said, it’s even more important to ensure that your portfolio doesn’t contain any undue risk.

It’s true that Bitcoin might go to $1 million per token one day, transform the world forever, and mint new millionaires daily. But it’s also really important to think about the opposite scenario: It continues to fall in value (it’s down about 50% since its previous highs) and simply never recovers. You’ll also pay fees to own it, depending on how you choose to do so.

Even if you invest 1% of your portfolio in Bitcoin (which is probably not enough to make a meaningful difference long term), you have to be comfortable knowing that a section of your portfolio is dedicated to speculation. You are hoping that in the future, someone will pay more for the asset you now hold. But along the way, there’s no dividend to be collected, and no promise of any future return.

Recall that humans are loss averse: a loss of money will feel worse than a gain of the same amount will feel good. It’s for this reason that even $1 lost in a speculative asset will feel pretty unpleasant, while even large gains might seem tenuous. With Bitcoin in particular — where the risk of ruin is palpable — you’ll want to be very careful before allocating an amount of any size.

Do you really need it?

Before converting any money to Bitcoin, be absolutely sure you know how much risk you’re able to bear. Also keep in mind that we often are poor judges of our respective abilities to handle risk. Often, we’ll think we’re fine with wild swings in prices until these swings happen in our own portfolios.

While Bitcoin has the potential to reach outrageous heights, it has tremendous risks that come along with it. So the question remains: Do you really need it in your portfolio?

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Sam Swenson, CFA, CPA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Bitcoin. The Motley Fool has a disclosure policy.

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