Every HNWI should buy Bitcoin
Do you own more than $1 million in assets? Then you’re amongst the one percentile of the world’s population most susceptible to market crises.
According to the research by Credit Swiss, half of the world’s wealth is now in the hands of 1% of the population. However, the ability to keep that wealth depends largely on the performance of three asset classes: stocks, bonds, and cash. Unfortunately, many high-net-worth-individuals (HNWI) are facing a significant crisis and it does not look like they will be able to milk more profits out of these assets.
I know what you’re thinking. The capital asset pricing model (CAPM) which describes systemic and expected risk has been around for generations. There is just one problem, timing. The equity markets are currently at their all-time highs and the US expansion is the longest in history, surpassing prior record from March 1991 to March 2001. And bonds have gone completely mad. The benchmark 10-year bond yield is negative in Germany, the Netherlands, Switzerland, Japan and not far from it in France.
Some pundits are already warning that we’re in the middle of an everything bubble.
Here is why this is important. It doesn’t take an expert to figure out that this cannot last forever. In fact, nothing in life lasts and the only certainty is change.
Thankfully, there are at least two relevant solutions to address the problem. One is in blind faith that central banks will continue increasing the money supply and print more money, which devalues currencies but boosts assets.
Another is to take ownership of your portfolio by investing capital at non-traditional assets, which could generate higher rates of return. In such extreme situations, each HNWI turns for advice to the portfolio manager. In order to model a portfolio’s future outlook these specialist look at many numbers and variables.
However, the most important number is the “expected rate of return,” or the target return on invested capital. This rate of return is typically between 6–8% annualized. As interest rates move up or down, the portfolios are directly impacted. Some estimates show that one sharp increase in interest rates could potentially lead to a 10% drop in the S&P 500. Economic growth expectations affect stock and fixed income even more. For example, during the 2008 financial crisis stock markets around the world plummeted 40–60%, but of course, the real economy didn’t shrink by 50% within a few months. Not exactly an exciting prospect for those currently owning 90% of assets in stocks and bonds.
Either way, HNWIs have to do something different. It’s believed that Einstein said that “the definition of insanity is to continue doing the same thing and expect a different result.
Instead of accepting the risk of substantially lowering the expected rate of return, investors should buy Bitcoin, cryptoassets and commodities.
Seriously, a potential solution to the future crisis is to buy Bitcoin and commodities. Here is why:
- Bitcoin is a non-correlated asset. In the everything bubble, almost all asset classes are highly correlated. Diversification between stocks and bonds is useless. Bitcoin’s current 180-day correlation to the S&P 500 is zero. Therefore your portfolio will zig when stock zag.
- Bitcoin has an asymmetric return profile. There is much more upside than downside in owning the asset. The downside is capped at the total amount of capital invested, yet the upside is still 100x in the long-term horizon.
- Commodities are inversely correlated to stock and bonds. So often, when other major asset classes fall, commodities rise. The benchmark Bloomberg Commodity Index is currently down 55% from the peak in 2011. And the best part is that commodities have intrinsic value, generally speaking, you can assume their prices will not fall to zero. Therefore, when certain commodities reach technical lows, I see a tremendous buying opportunity.
The modern portfolio theory argument for investing in Bitcoin is quite strong. But how has theory played out in practice?
Let me break this down to you in the case of Bitcoin, which has been by far the best performing asset over the last 10 years. It’s a deflationary, fixed supply asset based on a mathematical formula as opposed to fiat currencies, which are highly inflationary assets and decrease in value over time. Bitcoin has beaten the S&P 500 for the last 10 years, the last 2 years, and this year. I believe it will continue to outperform all traditional assets.
But there is a catch. Bitcoin is an extremely volatile and speculative asset. You could theoretically lose all of the invested money. For that reason, I suggest to all clients to invest only the amount of capital they would be willing to lose.
Here is how it works. An investment of 1% or less would materially change the performance of each portfolio. HNWI have usually a long-term capital which allows them to stomach high rates of volatility. For example, an investment of 1% of assets at $10,000 BTC price would yield a 9% increase in the portfolio’s total assets if Bitcoin reached $100,000.
But wait there’s more, many people believe Bitcoin will not only reach $100,000 one day but rather be worth $1,000,000. If that materializes, a 1% investment today could lead to the 90% increase in the total portfolio. And that’s what finance theory calls an asymmetric return profile.
Current exposure of HNWI to Bitcoin and crypto is only 0.07%, however. This must change.
As expected, this is not an easy decision for a wealth manager. There are numerous factors involved, including the bad press, lack of regulations or high volatility. Most HNWI are intelligent and experienced, but many of them are not familiar with the asset or blockchain technology.
It will take time for wealth managers to get comfortable with investing in Bitcoin. The network is still nascent, technology slow and the price too volatile. However, when one makes the decision, it will create a cascading effect that leads to hundreds jumping in.
Bitcoin has the potential to save us from the current everything bubble and future crisis. We just need to launch more products and infrastructure for HNWIs so the early adopters can make the first move.