Does Bitcoin Belong In Your Portfolio?

What is bitcoin? Is it in a bubble? Does it belong in a portfolio?

Those are the questions that Matt Hougan, CEO of Inside ETFs, and three experts sought to answer in an online webinar on Wednesday. The discussion took place as prices for the digital currency swung wildly near record highs above $10,000, up tenfold from where they began the year.

Gabor Gurbacs, director of digital asset strategy for VanEck, took a stab at answering the most fundamental question: What is bitcoin?

"In its simplest form, it is just a shared database technology, or distributed ledgers. Some are meant to be a store of value, like currencies, and hence they are called cryptocurrencies, like bitcoin," he said.

Valuing Bitcoin

Gurbacs said that bitcoin may be in a bubble after its rapid price appreciation, but that longer term, there may be more upside. If you consider bitcoin to be digital gold, he says it makes sense to compare it to the metal.

In that case, bitcoin's market cap of around $200 billion is only a fraction of the $8 trillion worth of gold in existence. To match gold, bitcoin would need to rise another 4000%.

Another framework to value bitcoin is comparing it to M1—the total quantity of currency in circulation.

"If you look at the list of countries and their M1s, bitcoin is the 21^st-largest country. In M1 terms, bitcoin is bigger than Mexico, Venezuela and Denmark. It's very close to Poland and Russia, but it doesn't approach the M1 of U.S., China or Japan," Gurbacs explained.

Polarized View

Jan van Eck, CEO and president of VanEck, and another panelist on the webinar, is enthusiastic about the technology behind bitcoin, but understands why people may be skeptical.

"It's a little bit like gold, a store of value, versus an asset that will generate a revenue stream like a bond or stock with dividends," he said.

"There are two types of investors in the world. Some people like gold because it's independent of government and a separate store of value," he added. On the other hand, he continued, "You find the investors that don't like gold―like Warren Buffett―really don't like bitcoin.”

VanEck introduced a series of cryptocurrency indices earlier this month, and has plans to launch a bitcoin ETF in the future. Meanwhile, another panelist on the webinar, Raj Lala, president and CEO of Evolve ETFs, is in the process of launching Canada's first bitcoin ETF, pending approval from regulators.

"The bubble question is tough, because this is a very new asset class people are trying to get their head around," Lala said. "I don't think I've ever seen anything in the last five years that's had such a polarized view as cryptocurrencies or bitcoin does. You see people calling for bitcoin at $40,000 by the end of 2018, and you see people calling for $400 by the end of 2018."

What Advisors Should Do

Regardless of where one thinks bitcoin prices are headed, it doesn't look like interest in bitcoin or cryptocurrencies in general is going away anytime soon. Financial advisors can expect to increasingly hear from their clients about buying into the craze. How should they respond?

"Digital assets are a type of disruptive technology. The first thing financial advisors have to do is not pooh-pooh the technology,” van Eck said. “Every major technology and financial institution I know of is investing heavily in blockchain technology. They have to understand how distributed ledgers work."

However, just as with stocks and bonds, you shouldn't put all your eggs in one basket. Van Eck compared the various digital asset platforms to early internet browsers. Netscape was the first usable browser, "but neither the browser nor the company that founded it are around," he said.

"You want to reduce your risk and exposure to any particular technology because it's early, and you don't know what the winner is going to be," van Eck explained, while noting that, long term, aggressive investors could reasonably have 0.5-1% of their overall portfolio in digital assets.

Contact Sumit Roy at [email protected]