Should Bitcoin be part of your asset allocation?

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Despite high volatility, it is hard to ignore the extraordinary returns given by Bitcoin over a short period of time. The oldest virtual currency lost half of its value on Wednesday and at one time was trading at as low as $30,000. Since then it has recovered and is currently trading at $40,000 level. The sudden dip in prices led to panic with many sellers getting rid of their holdings while others buying at the dip. With so much volatility should you consider Bitcoin while deciding on asset allocation?

While some experts suggest exposing some part of your portfolio to cryptos, others say to strictly stay away from cryptocurrencies. According to a recent research report from Fidelity, among an increasing number of investors and portfolio managers, bitcoin is considered a legitimate and distinct asset class. Jurrien Timmer, Director of Global Macro Fidelity Global Asset Allocation stated in the research report “If bitcoin is a legitimate store of value, is scarcer than gold, and comes complete with a potentially exponential demand dynamic, then is it now worth considering for inclusion in a portfolio (at some prudent level and at least alongside other alternatives, such as real estate, commodities, and certain index-linked securities)? For those investors, the question of bitcoin may no longer be “whether” but “how much?

Shweta Jain, the founder of Investography, disagrees. “We don’t recommend investment in crypto, we don’t consider it as a part of asset allocation. People who trade in it could take the extra money that they would like to speculate on (a small part of their savings) and do that. It’s a currency as there is no underlying asset.”

Experts suggest that one should trade only with money one can lose. Given the high volatility, the gyrations can be extreme either way. A smart buyer is always one who can control emotions and cashes in on rupee cost averaging with a long-term plan.

There are, however, many risks associated with virtual currencies. For example: unlike fiat currency which is governed by the regulator, cryptocurrency is governed by the simple rule of demand and supply. It functions more like gold which is similarly governed by demand and supply rule. Moreover, while the physical money is printed, in the case of Bitcoin the bots are supposed to mine the cryptocurrency. Currently, over 18 million are in circulation out of a pre-decided number of 21 million bitcoins that will ever exist. It is expected to be fully mined by 2140.

A recent report suggests that the government plans to form a new panel on cryptocurrencies. Currently, it is neither regulated by the Reserve Bank of India (RBI) nor the Securities Exchange Board of India (SEBI).