Bitcoin investment as risk diversification - icoinic
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Franklin Feringa - Fundamental Analyst - Icoinic B.V.
Franklin Feringa
Author
Analist

Bitcoin investment as risk diversification

While Bitcoin is still generally seen as an investment that is far too risky to add to a portfolio by traditional market participants, it can actually serve a great purpose to one’s portfolio, even for the traditional investors. The Bitcoin price can be extremely volatile, but that does not mean that it is riskier in every way. An example of how Bitcoin can aid in diversifying the risk exposure of your portfolio is the recent outbreak of the new Coronavirus.

Coronavirus

After being discovered late last year in China, the number of people that have contracted the virus has been growing fast.

Source: https://www.worldometers.info/coronavirus/coronavirus-cases/

This has caused the government to impose some drastic measures to limit the spread of the virus. Measures include closing schools, factories, businesses and pretty much putting entire cities in quarantine. Even cash money is not safe, as the Chinese Central Bank has announced that it will destroy some cash in hard-hit areas to prevent contamination through the exchange of paper money. Understandably, these measures have been putting a lot of pressure on the Chinese economy. Opinions on whether this outbreak will have a big impact on the global economy have been divided. 

However, recently the virus has spread to a lot of different countries. The most affected ones currently being South Korea, Italy, Japan, and Iran. So it is becoming clear that the outbreak will put pressure on an increasing number of economies.

Risk exposure

As it becomes increasingly evident that the outbreak will lead to global economic troubles, the risk of investing in the stock market is becoming greater by the day as the stock market is closely correlated to economic growth. Should the Coronavirus keep expanding to more countries, more businesses will suffer, resulting in significant declines of their share prices. These are riskier times for fiat currencies as well since governments might print considerable amounts of money to stimulate the economy, effectively weakening the currency. China has already done this recently.

The Coronavirus is not a real threat for Bitcoin. Whereas traditional investments such as the stock market and fiat currencies are bound to feel the effects of the virus, Bitcoin is not affected by any of the measures being taken by governments as everything is handled by autonomous code. 

Diversifying risk exposures is an important aspect of maintaining an investment portfolio. By investing a small portion of your entire portfolio in Bitcoin, you will gain an asset that is virtually unaffected by the threat that the Coronavirus brings, whereas most other traditional investments have high exposure to its effects.

This is just an example of how the less risky asset still has certain risk exposures that another riskier asset does not necessarily has. Combining such assets can have a positive effect on your overall portfolio risk. 

Conclusion

So investing in the Bitcoin definitely has its risks as it is a speculative and volatile market, but we cannot forget about the advantages if implemented correctly. It is not about which asset is better or less risky, but how you can combine them in an optimal way in order to diversify your risk exposure. 

This is a good example of why it is important to look further than the backward argument of “Bitcoin is too volatile and thus too risky to invest in.”

Luc Correia Cabrito