How a Little Bitcoin Could Transform Your Wallet

Hindsight is 20/20, and if we could go back in time, our wallets would likely contain piles of Nvidia, Tesla, and — you guessed it — Bitcoin.

The recent meteoric rise has left a number of investors in various states of emotion. some It was ecstasywhile others lament the thought of the times when Bitcoin was trading for a few thousand dollars. Heck, even sub-$30,000 prices through 2023 were a bargain in hindsight.

However, that’s the problem with Ewersight: everything seems clear, even when that wasn’t the case at the time. Perhaps in no other endeavor is it truer than when it comes to investing.

A little Bitcoin goes a long way

I remember talking to a wealth manager friend of mine several years ago as they tried to juggle providing advice on Bitcoin at a time when their company did not offer crypto exposure. They acknowledged that while they did not necessarily believe in Bitcoin, such a small exposure (say, 5% or less of their portfolio) could be reasonable for investors who He does He believes in the potential of Bitcoin.

You’ve taken a look at what this type of exposure means for an investor’s portfolio, and you know what? A little Bitcoin has gone a long way for those who have taken a risk.

In our example, we only allocated 5% of their assets to Bitcoin and put the rest in the S&P 500, while the other portfolio consisted of 100% S&P 500 exposure. At the time, some investors felt that even risking between $100 and $500 on a portfolio With $10,000 (1% to 5% allocation) it was like throwing money away.

Looking back, the “risk” seems very small – now.

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In our example, a $10,000 portfolio would have grown to over $65,000 with Bitcoin allocated for a portfolio value of about $34,000 under the All-Stock approach. In other words, the cumulative return of that portfolio More than double Versus a portfolio that was composed of 100% stocks (554% vs. 238%).

Don’t get me wrong, turning $10,000 into over $30,000 in a decade is an excellent feat, no matter what. However, seeing such a huge change in performance due to a small allocation in a risky asset really underscores the built-in long-term effects when that asset turns out to be a big winner.

From a drawdown perspective, the All-Stock portfolio suffered a maximum drawdown of 24% as a result of the 2022 bear market. However, the portfolio with a 5% Bitcoin allocation only suffered a maximum drawdown of 25.6% (which occurred during the same period).

Has Bitcoin gone to zero? Well, this is the fun part. Even with a total loss on the Bitcoin allocation of 5%, the portfolio would still generate a CAGR of 12.6%—slightly less than the 13% generated annual growth rate of the all-stock portfolio.

Looking back, those who allocated a small percentage of their portfolio in Bitcoin faced two main risks: the existential risk that Bitcoin fell toward zero and the cryptocurrency’s additional volatility as it ebbed and flowed over the past decade.

In hindsight, most investors would have gladly accepted what turned out to be less than 2 percentage points of additional risk to the downside in exchange for more than 300 percentage points additional to the upside. Added volatility? Well, it was hard to stomach.

What’s the point of being too late?

The point here is not to make people feel bad about Bitcoin — or really, any other asset or stock that has done well over the past five to 10 years. Instead, the goal here is Rethink risks – Not in a way that tries to justify an unnecessary gamble, but in a way that takes calculated risks when investors have strong conviction.

For every nvidia or Bitcoin, there are dozens or perhaps hundreds of investments that failed to work out. In this context, investors shouldn’t take a shot at everything they see trending on social media.

To gain this conviction, they need to approach the markets with an open mind and do their research. If after all that, investors feel strongly about or holding an asset, they can approach it with a bite-sized amount of risk. If it fails completely, it won’t cost them all their hard-earned savings. But if it takes hold—as Bitcoin has done—it could significantly boost its long-term returns.