The pullback is 20/20 and if we can go back in time, our wallets would involve a lot of Nvidia, Tesla, and, you guessed it, Bitcoin.
The latter’s meteoric rise has left a number of investors in various states of emotion. Some have been euphoric, while others are regretful thinking back to times when Bitcoin was trading for just a few thousand dollars. Heck, even the sub-$30,000 prices throughout 2023 were a bargain in hindsight.
In retrospect, however, that is the challenge: everything is very clear, even if it was not at the time. Perhaps in no other company is this more true than when it comes to investing.
I do not forget to have argued with one of my friends from the Heritage administrators several years ago when they sought to juggle with Bitcoin’s recommendation at a time when their business did not offer exposure to Cryptoactive. They admitted that even if not necessarily in Bitcoin, a small exhibition (for example, five % or less of its portfolio) can be moderate for investors that in Bitcoin’s perspective.
I took a look at what that kind of exposure would mean for an investor’s portfolio, and you know what?A little bit of Bitcoin has been a big help to those who took the risk.
Feedback generated with Portfolio Visualizer. Data Tracks from 01/01/2014 to 12/31/2024
In our example portfolio, we only allocated 5% of its assets to Bitcoin and put the rest in the S&P 500, while the other portfolio was composed of 100% S&P 500 exposure. At the time, some investors felt that even risking something between $100 and $500 on a $10,000 portfolio (a 1% to 5% allocation) was like throwing money away.
Behind the scenes, however, this “risk” is so small, now.
In our example, a $10,000 portfolio would have grown to over $65,000 with the Bitcoin allocation, in comparison to a portfolio price of around $34,000 with the all-inventory approach. In other words, the cumulative go back of this portfolio more than doubled in comparison to the one hundred percent inventory portfolio (554% as opposed to 238%).
Don’t get me wrong, turning $10,000 into more than $30,000 in a decade is stellar work, regardless of other what-ifs. However, to see such a massive change in performance due to a small allocation in a risky asset really underscores the long-term compounding effects when that asset turns out to be a huge winner.
From a loss perspective, the portfolio of the entire stock suffered a maximum decline of almost 24% due to the 2022 bear market. However, the portfolio with a 5% bitcoin allocation only suffered a maximum decline of 25. 6% (which occurred in the same period).
And had Bitcoin gone to zero? Well, here’s the fun part. Even with a total loss on a 5% Bitcoin allocation, the portfolio still would have generated a compound annual growth rate of 12.6% — just slightly below the 13% CAGR of the all-stock portfolio.
In hindsight, those who allocated a small percentage of their portfolio to Bitcoin faced two main threats: the existential threat that Bitcoin declined to 0 and the additional volatility of the cryptocurrency as it declined and flowed beyond the decade.
The 10-year monthly performance for Bitcoin. Source: eToro, Bloomberg
In hindsight, most investors would have gladly accepted what turned out to be less than two percentage points of additional downside risk in exchange for more than 300 additional percentage points on the upside. The added volatility? Well, that would have been harder to stomach.
The goal here is not to guarantee that other people will feel bad about Bitcoin, or any other activity or stock that has performed exceptionally over the last five to ten years. The goal here is rather to reconsider the threat, not in a way that attempts to justify a dead bet, but in a way that leads to a calculated threat when investors have strong conviction.
For every Nvidia or Bitcoin there are dozens or perhaps hundreds of investments that failed to work out. In that context, investors shouldn’t take a shot on everything they see trending on social media.
To get that conviction, they need to approach the markets with an open mind and do the research. If after all of that, investors feel strongly about a specific asset or holding, they can approach it with a bite-sized amount of risk. If it completely fails, it won’t cost them all of their hard-earned savings. But if it pans out — like Bitcoin did — it could drastically enhance their long-term returns.
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