For all the debate about Bitcoin being untested and unproven, the jury is not out on the asset class. In fact, the verdict has been returned for over a long, long time, according to Brian Dixon, CEO of Off the Chain Capital.
Dixon oversees around $360 million in assets in his SEC-registered RIA/hedge fund, including a sizable position in Bitcoin, which at last check traded at just under $67K a coin, up 51 percent year-to-date, 142 percent in the past year, 1,057 percent in the past 5 years and over 20,300 percent since 2015.
Just to remind folks, most financial advisors assess mutual funds for clients based on their YTD, 1-year, 3-year, 5-year and 10-year results.
Furthermore, Bitcoin currently has a Sharpe ratio, which measures risk-adjusted returns, of 4.09, according to tracking site PortfoliosLab. A Sharpe ratio of 3.0 or higher, for the record, is considered excellent.
So if the long-term performance and the risk-adjusted returns are there, why do some financial advisors remain hesitant to add Bitcoin - now an asset class valued over $1.3 trillion - to client portfolios?
“They haven't done their homework and they don't understand how Bitcoin has an enhanced Sharpe ratio and benefits overall volatility in a portfolio,” said Dixon. “And it’s most like that their company is not allowing it as it disrupts their status quo.”
Dixon believes most financial advisors will elect to acquire Bitcoin via the ETFs once they finally make the jump, as they can do so in a traditional brokerage account. In his view, this is most likely the “easiest on-ramp with the least friction.”
That said, he believes it is important to understand that owning the Bitcoin ETF is not the same as owning Bitcoin in terms of property rights.
“The ETF is just exposure to Bitcoin, but owning Bitcoin directly gives the property rights to move and store the asset how you want to,” said Dixon. “Also, in the future as adoption continues, I believe that directly owning Bitcoin will command a premium over the price of the ETF as the scarcity continues to enhance over time.”
In terms of allocating Bitcoin into client accounts, Dixon believes “in the future, everything loses value relative to Bitcoin.” With that in mind, he advises new investors to start exploring a 3 to 5 percent allocation at a minimum even if he is more comfortable with a larger one.
As to the risks associated with Bitcoin so widely identified by its skeptics, Dixon says they don’t add up in his view.
“The governments generally have already decided they aren't going to ban it, and some of them did look into this back around 2013,” said Dixon. “The only real way to stop Bitcoin temporarily is to shut off the energy grid or the telecommunications networks. Even if that occurred, that would only stop Bitcoin until they were back online again and then it would pick right back up.”
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