Many retail investors first invested in Bitcoin during the 2017 crypto boom, when the Bitcoin price nearly hit $20,000. This was followed by a period of deep correction in 2018 that changed sentiment for a lot of newcomers. In 2020-2021, crypto summer came again, and now the Bitcoin price is even higher than it was in 2017. As a result, interest in Bitcoin has surged significantly in 2021. But for many, one question has become a deterrent — how much is it worth to invest in Bitcoin.
Before trying to answer this question, it is worth mentioning a few myths that are still relevant for nocoiners. For example, some people think that investing in Bitcoin is “too expensive” since you can buy at least 1 BTC. But this is not the case. 1 BTC is divided into 100 million satoshis which form the smallest Bitcoin division unit. This means that it is possible to own Bitcoin even for less than one cent.
Another myth is the statement that having less than 1 BTC does not pay off. In reality, only 2-2.5% of all Bitcoin addresses have 1 BTC or more on their balances. In addition, there is an opinion that it is enough to own 0.28 BTC to enter Bitcoin’s elite 1% club (1 owner can have dozens of wallets and addresses).
After clarifying this, here are some popular opinions on how much Bitcoin investors should own
Wall Street: from 0% to 10%
In tons of articles, financial experts advise investing in Bitcoin only a small part of the funds. Mostly it is 1-2%. There are also recommendations to avoid cryptocurrencies due to their volatility or invest up to 10% if you are confident in the success of Bitcoin and are looking for long-term investments.
But where did this 1-2% come from? Let’s take as an example one of the most popular portfolios on Wall Street — 60/40, where 60% is for investment in bonds and 40% for the stock market. Also, consider the Black-Litterman model that Wall Street traders often use for portfolio management. This model assumes the use of the world market portfolio.
By 2021, the global stock market value reached $95 trillion, while the bond market was estimated at $105 trillion. In turn, the Bitcoin market capitalization in 2021 was in the range of $600-1000 million. Applying the Black-Litterman model to a 60/40 portfolio, it will show that the starting point for Bitcoin allocation is 0.5-1%. If you expect the return on Bitcoin to be much higher than stocks’ and bonds’ return in the portfolio, then Bitcoin can be allocated up to 2%, or even 10% of the total portfolio, depending on the expected growth and risk management.
And as the Coin Shares study showed, adding Bitcoin to such a portfolio is justified. Allocating 4% to Bitcoin for 60/40 (means 58/38/4) helped double the portfolio’s return. Besides, Bitcoin has performed better than gold as a method for portfolio diversification.
Thus, 1-2% advice is more aimed at those who already have an investment portfolio and are considering adding Bitcoin or other cryptocurrencies to their existing portfolio for profitability growth and diversification. But this principle can also be helpful for retail investors and crypto newcomers. For example, in the case of investing 1-2% of your salary in Bitcoin from time to time, it is possible to accumulate Bitcoin without significantly affecting other expenses.
Crypto enthusiasts: invest what you can reasonably afford to lose
This statement is mostly referring to price volatility and the safety of funds.
Even though Bitcoin has established itself as a store of value and an asset to protect against inflation in long-term investment, it is still a fairly volatile asset. Bitcoin’s all-time volatility is around 3-4%, but in 2021 this figure reached 5-6%. For comparison, gold has a volatility of 1-1.5%. The reason for this difference is that the Bitcoin market is nascent and has relatively low liquidity compared to many traditional assets.
Although volatility is not very significant in long-term investing, it can become dominant in short-term investments. Bitcoin can drop by 10-20% in a day or 80% in a few months, as it was in 2012, 2014, and 2018. But at the same time, it can surge by hundreds of percent, as in 2013, 2017, and 2021. A lot of newcomers sell and buy on emotions, so crypto enthusiasts advise investing only what the investor can afford to lose.
The safety of funds means that there are cases when investors lost the keys to their wallets and could not access their Bitcoins. At the moment, a lot of crypto wallets offer different ways to protect and restore private keys, but if the user does not take care of this in advance, then there is a chance of losing funds.
As Bitcoin history shows, its price updates all-time high every 3-4 years. So if investors are ready for long-term investments, then the answer to the question of how much to own depends on the preferences. You can accumulate Bitcoin over a long period in small amounts (1-10%) or allocate a certain free capital without harm to other expenses by buying Bitcoin on a cryptocurrency exchange such as CEX.IO.
If an investor is planning a short-term investment in Bitcoin and wants to take advantage of price volatility, then a constant rebalancing of the portfolio may be required depending on the market situation.