Bitcoin, Price Volatility, and Your Portfolio

June 22, 2023

Should the price volatility of an asset preclude its inclusion in a responsibly allocated investment portfolio?

One of the assets in the chart below is bitcoin. The others are top constituents of the S&P 500. Bitcoin exhibits large price volatility. So do the others. In this context the characterization of bitcoin’s risk as a function of its volatility is actually taken out of that context – unless the same risk judgment is applied to Meta, Amazon, NVIDIA, et al.
There is a dimension to bitcoin as an investment that is not taken account of in volatility/risk arguments by debate participants unfamiliar with the fundamental investment case. Unlike the S&P 500 as a whole or any individual constituent, the bitcoin return function permits a sizing that makes irrelevant any level of volatility.

The singular differentiating factor between holding bitcoin and a conventional equity: in success mode, the ultimate demand for it, depending on the store-of-value or money-usage comparator (gold, money supply, government debt universe), could result in a 2x or 3x order-of-magnitude increase in market capitalization. That is not 2x or 3x, but 100x or 1,000x.

Ergo, the portfolio weighting in a fixed-supply digital currency like bitcoin can be a de minimis amount. In which case, the volatility of the tiny position, one that can nevertheless completely transform the portfolio returns in a success scenario, is irrelevant.

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