Weekly Watch | The Crypto Come Up
Bitcoin is a technological tour de force - Bill Gates
As we return from the holiday weekend, stocks snapped their recent rally as the 10-year Treasury yield dropped to its lowest level since February. However, the Technology sector has continued to carry the broader market with Amazon.com (AMZN) pushing the Nasdaq to another all-time high. Together we find that this slowing economic growth combined with excess liquidity in the market provides for a volatile environment. Debates over the Fed’s tapering continue to be a topic of discussion.
Jerome Powell recently announced that the Federal Open Market Committee projects to conduct two interest rate hikes in 2023, which means the Federal Reserve has, at last, acknowledged the inflation that has occurred during the pandemic’s extensive recovery period. In an inflation era, it is paramount that investors allocate their assets to hedge inflation in observance of the four-to-one stock market return, which has occurred since 1971 when compared to returns of simply keeping your funds in a savings account at a bank. Due to the time’s requirement for asset allocation, many prominent investors have recommended new allotment strategies for their portfolios. The most recent and ubiquitous recommendation is for investors to allocate 5% of their portfolios to cryptocurrencies.
Paul Tudor Jones, a billionaire hedge fund manager and Wall Street veteran, announced last week that inflation hedging is important as ever remarking that, “The only thing that I know for certain is I want to have 5% in gold, 5% in Bitcoin, 5% in cash, and 5% in commodities at this point in time” (Forbes 2021). Prior to this, Tudor had stated last year that he allocated 1-2% of his portfolio to cryptocurrencies, mostly Bitcoin. This is evidence that he is more confident in the stability of Bitcoin and other stable cryptocurrencies as a key area of the market to be invested. Tudor’s boosted outlook on cryptocurrency is in part due to the Federal Reserve’s insistence on growing employment while labeling the inflation as transitory, which he calls an intellectual incongruity, and views Bitcoin as a safe hedge to this dangerous inflation policy. Additionally, Wall Street strategist and CNBC contributor Tommy Lee has stayed firm on his prediction that Bitcoin’s stock will be priced at $100,000 by year’s end. The large drop from Bitcoin’s high of $65,000 has not swayed Lee from his initial prediction as he points out that volatility comes with the nature of Bitcoin, and the long-term value and premise of the “gold of cryptocurrency” is still intact. He also added that a lot of the selling that has caused this volatility is not from the original holders of the asset, but new investor accounts who may have been startled from the recent Bitcoin roadblocks, namely Elon Musk’s influence on the asset, Chinese regulations, and leverage buildups.
Many investors still warn of the volatility and risk of some cryptocurrencies as many of these new coins are susceptible to crashing to zero. Due to the market being very new and lacking long-term data on how these cryptocurrencies will fare, the nature of the stock’s future is still very unpredictable. Though the unpredictability of crypto is quickly narrowing, investors should not put more into cryptocurrency than they can afford to lose. However, if a person is knowledgeable about cryptocurrencies, the return potential for many of these stocks are too astronomically lucrative to not contribute at least some of their portfolio to it. The digital markets of Bitcoin and other cryptocurrencies are uncorrelated to any other category of assets, so having 5% of your portfolio consisting of digital assets provides a great diversification boost in a world where many assets are ever-increasingly tied together. The Chief Risk Manager of B2C2 Japan recommends that he would go as high as putting 20% of your portfolio into solely Bitcoin and avoid alternative coins due to the tax headaches that they present. With Bitcoin’s total market capitalization surpassing two trillion dollars, it is impossible to ignore the asset, and most investors, even those who were most openly against Bitcoin and Crypto, have changed their tune. Shark Tank Investor Kevin O’Leary, who called Bitcoin “garbage” in 2019, just recently announced he will be contributing 3% of his portfolio to the asset. Major companies have followed the trend, with Micro Strategy investing 250 million in Crypto last August, Square investing 50 million in the asset last October, and Tesla purchasing 1.5 billion of Bitcoin in January.
The bottom line that can be seen from investors is this: crypto is here to stay. Furthermore, some of the greatest transfers of wealth that markets have ever seen will occur in the coming years, and we are already in the preliminary stages of this phenomenon. Whether it be for the sprint investor or the marathoner, the influence of some of these cryptocurrencies will soon become a staple of any investment portfolio. What we are beginning to see is a market that is no longer just a fad, but a mainstay that is leveling out to a solid measurable chart of growth. Putting 5% of your portfolio into Crypto will bode well, as many predict Bitcoin, the gold of cryptocurrencies, could reach $500k by the end of the decade.