In the dynamic world of crypto, Bitcoin has stood out as one of the most impressive assets, showing remarkable performance and resilience over the years. Although it has faced massive criticism and price fluctuations, the crypto leader has successfully maintained an upward trajectory over time, proving to be a valuable asset for investors seeking to earn substantial returns. With its 50% annual record, Bitcoin price USD prediction has recovered from its lows gracefully and outperformed traditional investments successfully. In this article, we will take a look at the impact of adding Bitcoin to your traditional portfolio, so read on to learn more!
What is an investment portfolio, anyway?
A portfolio represents a collection of different financial investments, ranging from bonds and stocks to cash equivalents and exchange-traded funds, to name just a few. In general, people think that bonds, stocks, and fiat money represent the core of a portfolio, and although this may often be the case, it’s not necessarily the rule because a portfolio can include various assets, including art, real estate, private investments, and cryptocurrency. Portfolio management is essential for active investing, and you can do this yourself or by considering the help of a financial advisor, money manager, or another financial expert who can use their expertise and knowledge to guide you in the process.
An essential concept that every investor must remember when it comes to portfolio management is diversification, which refers to not putting all the eggs in one basket and, instead, looking to lower risk by including different options in your portfolio. This will help you maximize your returns, as those different investments will react differently to an event. How you choose to build your portfolio is only up to you, and it depends on factors like your future goals, your risk appetite, as well as your personality, and other unique circumstances.
What is the role of Bitcoin in a traditional investment portfolio?
In a world of stubborn inflation, extreme fiscal policies, and other macroeconomic challenges, the fundamental properties of Bitcoin may help it become a strong hedge against uncertainties for investment portfolios. When creating a financial portfolio, the average investor gets the standard advice of owning a diversified mix of bonds and stocks, using tax-advantaged accounts if possible, not timing the market, and researching the best investment product. Suppose bonds and stocks generated uncorrelated and healthy returns; in that case, this advice would indeed lead to impressive outcomes. But the truth is that today’s investors face multiple challenges. First of all, the long inflation decline that started in 1980 is over, and in this new context, bonds may not have the same success when it comes to generating the same returns as the last forty years. Furthermore, numerous assets are correlated today, so generally, investors miss out on the diversification benefits of owning these assets together in an investment portfolio. While large institutional investors have attempted to tackle these challenges by choosing private assets like real estate and venture capital, these alternatives aren’t accessible to average savers.
To this end, the crypto asset class is considered a good solution for these challenges, particularly when considering a modern financial portfolio. Although Bitcoin is still a relatively novel asset, research indicates that its role in an investment portfolio can be impactful due to its unique fusion of scarcity and potential for substantial returns.
According to research, small allocations of Bitcoin on a portfolio can positively impact risk-adjusted returns, unlike other assets. This is also due to its low correlation with traditional investments. However, each investor should consider their unique goals and circumstances when deciding whether to invest in cryptocurrencies like Bitcoin, as this asset class is regarded as high risk. As a general rule, it is recommended to allocate around 5% of your portfolio to cryptocurrency, as a way to optimize its risk-adjusted returns.
While traditional investments are limited by regulatory constraints and geopolitical boundaries, the network that Bitcoin operates on is borderless, offering global accessibility that can be valuable, especially for those who seek exposure to different economic landscapes.
Beware of these mistakes when building your investment portfolio
Building an investment portfolio isn’t easy – in fact, it requires commitment and making informed decisions. Unfortunately, it can be common for investors to choose the wrong options without understanding investment basics, and the markets, leading to losses in the long term. Some of the most common mistakes investors make include:
- Not clarifying their financial goals. There’s an adage that says” If you don’t know where you are going, you will end up somewhere else”. Well, this applies to investing as well. Your goals will impact everything from your investment strategies and plan to the portfolio’s design, so rather than focusing on the latest fad in the market, you should aim to design a portfolio aligned with your goals.
- Not sticking to their plan because their actions are driven by emotion. It’s common for investors to succumb to the fear of missing out when navigating the crypto landscape, but this is the wrong way to approach the market and won’t get you anywhere close to your goals. It’s essential to make a sound judgment, be disciplined, and always guide your decisions based on facts, not emotions like greed or fear.
- Thinking there is a “right” time to invest. Although the market is volatile, that doesn’t mean investors should wait to build an investment portfolio. Instead, a better approach is to start once you have discretionary funds available and keep adding what you can afford on the way.
The bottom line
Building an investment portfolio is an excellent way to make money work for you, and the good news is that you can do this with only a few hundred dollars. In fact, many apps include small minimum trading amounts and enable you to automate investments, both fortnightly and monthly, meaning that you can easily build your portfolio size through dollar-cost averaging.
Instead of only sticking to traditional investment options, it can be a good idea to add Bitcoin to your portfolio due to the potential it offers to enhance your returns. But of course, it’s essential to carefully consider the risks before you do that, and decide for yourself whether it fits into your financial plan and objectives.