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The New Bitcoin Portfolio Diversification Strategy

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Successful investing, like many endeavors, is often discussed simplistically, as though it were an either/or activity.   Either you store your nest egg in an FDI-insured bank account and let it gradually accumulate a return at a paltry rate of interest.  Or you do something highly speculative with your cash — like play the futures market or slap money down on momentum stocks – with an eye towards a quick and luxurious return on your investment.

There’s something to be said for both extremes.  It certainly makes sense to keep cash on hand in case of an emergency.  Having enough cash available to cover six months’ worth of your basic expenses is a good rule of thumb.  But keeping the bulk of your portfolio in cash, especially at current reduced rates of interest, is foolhardy.  A portfolio consisting solely of cash in the bank can never grow enough to fund you in your retirement years.

Still, highly aggressive investments in vehicles like momentum stocks or the futures markets can wipe out an unseasoned investor in months or even weeks.  But a diverse portfolio that allows for ample protection as well as a bit of rapid growth is a good way to go.

Towards this end, a portfolio consisting principally of gold – physical gold – and a moderate quantity of bitcoin can work very well for a lay investor.   Here’s why. Gold has been around for thousands of years.  As former U.S. Mint Director, Ed Moy, has observed, “Gold is the undisputed king of longevity for being in use since the dawn of civilization.”

What’s more, gold is a tangible asset that routinely serves as a safe haven for investors fleeing the negative effects of equities markets and a declining dollar.  Central banks store physical gold to hedge their inventory of world-reserve currency (dollars) and the devaluation of their home currencies.  Because of gold’s limited above-ground supplies, investors can feel reasonably confident their own stash of physical gold will hold its value and stabilize their portfolios.

If gold represents a balanced portfolio’s stabilizer, bitcoin can serve as its primary growth additive.  The new electronic currency, bitcoin, has ranged in value (in dollars) from zero to $1,230.00 and is currently around $416.00.   Target, Subway, Paypal, Amazon, Victoria’s Secret and Zappos are just a few of the many businesses that now accept bitcoin.  The cryptocurrency stands only to grow in value as its circulation base expands.  As such, it represents a splendid opportunity for robust growth in a balanced portfolio.

The question remains why invest in bitcoin, and why not invest in momentum stocks or even value stocks for rapid growth?  There are several reasons – mainly having to do with the current challenges of publicly owned stocks.

According to a recent poll by FactSet, analysts anticipate first-quarter earnings per share in the S&P 500 will decline by 8.7 %.   If they’re right, this will be the fourth consecutive quarter of a decline in earnings.  This decline would also mark the first such four-in-a-row series of declines since the 2008-2009 financial crisis.

Clearly, if S&P stocks are this vulnerable to decline, momentum stocks – smaller speculative stocks – will be even more vulnerable.

Also, many of the stock purchases we’re now seeing are originating from company stock buybacks. This kind of stock purchase, if handled in sufficient quantity, can reduce the number of outstanding shares and make a stock appear more attractive to outside investors.

If you happen to know someone in a company and have intimate knowledge of its markets, as an investor, you might have a leg up.   But lacking such knowledge, you’d best steer clear of a momentum – or so-called “hot stock” – in the current market environment.

For an alternative approach to a balanced portfolio, then, you might want to consider a mix of bitcoin and physical gold.  Bitcoin represents a new form of investment.  So be sure to use your own tolerance for risk and your available resources as guidelines to the respective percentages of gold vs. bitcoin you choose to invest.

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