Why It’s Smart to Include Bitcoin in Your Investments

Everybody wants to make smart investments and make their money work for them, but what is the best way to do it? One thing is for certain at the moment – putting it in the bank and relying on the interest definitely won’t be making you rich anytime soon. Interest rates plummeted in the wake of the 2008 financial crash and have remained at historically low levels ever since. The benchmark Bank of England base rate currently stands at a negligible 0.1% and has done for 13 months!

Every individual will be different, but two of the most important factors to consider when investing are what balance of risk versus returns you will accept and the length of time you are prepared to tie up your money for. Whatever your views on these matters however, there is one thing that all the experts agree on – make sure that you have a diverse portfolio of assets – or as the old saying goes, don’t put all your eggs in one basket!

The theory of diversification of assets was first put forward by young economist Harry Markowitz in 1952 and he subsequently won a Nobel Prize for his work in 1990. His ideas formed the basis of ‘modern portfolio theory’ which is the mathematical discipline of picking the best mix of assets to invest in. The goal is to choose a portfolio that works out to be greater than the sum of the individual parts.

Perhaps the biggest insight of Markowitz’s work was the realisation that what is of crucial importance to the overall strength of a portfolio is the degree of correlation between the assets it contains. If there is too great a degree of correlation between the assets in the mix then the investor is exposed to the dangers of the kind of plunge in value that hits all markets from time to time. For example, some investment managers have been known to argue that a portfolio of stocks and shares spread over a wide range of different industries and geographical locations is the best investment option. This will usually work under normal stock market conditions, but you only have to consider how the whole stock market crashed in 2008 to see the possible pitfalls.

Other types of assets which are often included in investment portfolios are property and government bonds and gilts. Property has historically delivered sound returns to investors, but its fortunes correlate strongly with the stock market and so they tend to rise and fall together – think of how the subprime mortgage crisis in the USA was the trigger for the global stock market crash of 2008. Government bonds and gilts are typically far more stable, but the downside is that overall they deliver a far lower rate of return.

However, it appears that a new class of assets is now available to investors which offer the prospect of high rates of return allied with a very low level of correlation to the other more traditional investment vehicles. Cryptocurrencies! The most famous and most widely used of these, Bitcoin, launched in 2009. In its short lifetime, it has enjoyed stellar rates of return, increasing in value from being worthless to a current value of around £40,000. Cryptocurrencies are notoriously volatile and of course, past returns are no guarantee of future profits, but Bitcoin also has the investment benefit of showing very little correlation with stock markets and property markets making it an excellent prospect for diversification of portfolios.

Because of their volatility fund managers recommend holding between 1 to 5% of your assets in cryptocurrencies. If you are thinking of investing there are plenty of resources available online such as Bitcoin trader software where you can find out more – getting some Bitcoin in your portfolio could be a smart way to make your money work for you.