As Bitcoin becomes more accessible through ETFs, investors face key decisions about allocation, volatility management, and correlation with traditional assets.
As cryptocurrencies become more accessible through exchange-traded funds (ETFs), investors face increasingly complex decisions regarding how to integrate digital assets into their portfolios.
Key considerations include:
Some institutions advocate for sticking with the most liquid and widely traded cryptocurrencies, arguing that the current crypto landscape lacks enough mature alternatives to justify broader indexing.
Cryptocurrencies are notoriously volatile, a characteristic often viewed as a drawback, though this volatility is frequently attributed to the early-stage nature of the asset class. Much of the current crypto volatility is driven by the behaviour of retail investors, who still dominate the space.
As institutional participation and market liquidity grows, the expectation is that volatility will moderate, similar to how other assets like gold evolved before becoming broadly adopted.
Bitcoin's volatility has evolved significantly since its inception in 2009, reflecting the maturation of the cryptocurrency market. In its early years, Bitcoin exhibited extreme price swings.
For instance, in 2013, its price surged from around $13 in January to over $1100 by December, only to crash below $200 in the following years. Similar dramatic fluctuations occurred in 2017 and 2018, when Bitcoin skyrocketed to nearly $20,000 before plummeting to around $3000.
More recent trends suggest a gradual decline in volatility. For example, in 2023, Bitcoin’s price ranged between $16,000 and $31,000 - a far narrower band than in earlier cycles - and despite macroeconomic pressures, daily price movements were less erratic.
While Bitcoin remains more volatile than traditional assets like gold or the US 500 (S&P 500), the reduction in sharp price swings signals that the asset may be stabilising as it becomes more integrated into mainstream finance.
Contracts for difference (CFD) trading participants should understand that as ownership shifts and Bitcoin becomes more embedded within diversified portfolios, its risk profile may evolve.
From a portfolio construction perspective, Bitcoin's correlation with other investments remains a critical factor for diversification potential.
Online trading investors should understand the duration and frequency of these correlation spikes when determining Bitcoin's true diversification potential.
Research suggests that allocating between 1% and 5% of a portfolio to Bitcoin can enhance risk-adjusted returns. The 3% allocation level is often cited as optimal, improving performance without significantly increasing downside risk.
Crypto can be viewed similarly to other alternative investments like venture capital or high-growth equities..
The June to July rally briefly took Bitcoin above its December to January highs of $108,287.62 to $109,354.00, reaching a $110,598.55 one-month high before consolidating.
Bitcoin’s advance may struggle in the short term below its record May high of $111,965.80 and could retrace lower towards its early July low of $7,335.44, with a fall potentially opening the door for the 55-day simple moving average (SMA) at $6407.78 and the early July low at $5159.03 to be reached.
A rise in Bitcoin above its May to July highs of $110,617.03 to $111,965.80 could potentially target the 261.8% Fibonacci extension level at $122,056.92, projected from the 2022 low
Remember that cryptocurrency markets are unregulated and highly volatile, and that you may lose all your investments. Consider your investment goals and risk tolerance before investing.
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