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Discover how Bitcoin ETFs are simplifying investment options in our latest update. Our investment committee outlines the process of incorporating Bitcoin ETFs into portfolios for those opting in and capable of handling its volatility, emphasizing a strategic allocation of up to 2%.

As we mentioned in last quarter’s letter, Bitcoin can now be purchased in a brokerage account through an Exchange Traded Fund (ETF). Up to this point, gaining exposure to Bitcoin was a relatively difficult process, and the availability of ETFs makes it much simpler.

To date, we have not included Bitcoin in our portfolios for a variety of reasons, the most important being the extraordinary level of volatility, combined with the general difficulty of acquiring and holding it. With the onset of Bitcoin ETFs, some of these barriers are coming down.

We’ve spent the last few months doing due diligence on evaluating the myriad of Bitcoin ETFs that are out there, understanding how they gain exposure to Bitcoin, security protocols, their underlying cost structure, and potential liquidity issues. As a result of this process, we’ve identified a couple of Bitcoin ETFs that we believe do a good job of capturing Bitcoin returns.

These funds are highly liquid and can be bought and sold with the same relative ease of any other ETF or mutual fund. The launch of Bitcoin ETFs has garnered enormous interest worldwide. At this stage, the inflows into Bitcoin have far exceeded the inflows that came into gold when it first became available through ETFs, making Bitcoin the most successful launch in ETF history. And for the first time, making it practical for consideration as part of a long-term portfolio.

We recognize that Bitcoin isn’t for everybody, and for reasons discussed below, we wouldn’t necessarily recommend it for everybody. At the same time, our Investment Committee has approved it for inclusion in portfolios for those who are interested and can stomach the volatility. This isn’t a decision we’ve made lightly; we’ve been following Bitcoin closely for several years.

We, like most people, have been increasingly concerned about the level of debt and the growing deficit in the United States. The rate of growth of U.S. debt has reached epic proportions. And while the U.S. dollar is and will likely remain the strongest national currency for the foreseeable future, the ultimate, long-term impact of debt cannot be ignored.

We view Bitcoin as a hedge against traditional economic and financial system weaknesses. The rising national debt and increased government spending in many countries, not just the U.S., are major long-term concerns. Historically, such fiscal policies have led to inflation and devaluation of national currencies.

Bitcoin (much like gold) derives its value from the collective belief in its utility as a medium of exchange, store of value and scarcity. Bitcoin has a maximum quantity of 21 million coins (with approximately 19.5 million currently in circulation). This scarcity represents an important fundamental difference between Bitcoin and fiat currencies, which are backed by governments who have the ability to print unlimited quantities of currency.

Adoption is one of the keys with Bitcoin, which has no value beyond its collective belief as a medium of exchange and store of value. The more individuals and institutions that see Bitcoin as a viable asset, the more entrenched it becomes in the financial landscape.

Bitcoin Adoption and Market Impact

Bitcoin’s adoption has indeed been growing worldwide, among both individuals and institutions. This increased adoption supports its potential long-term value. Morgan Stanley, New York Life, Tesla and MassMutual have taken significant stakes in Bitcoin over time, among other institutional investors.

Volatility and Investment Recommendations

Having said that, the extent of this adoption and its impact on value can be highly volatile and is influenced by factors such as regulatory changes, market sentiment, macro-economics, and technological developments. As we acknowledged at the beginning of this letter, Bitcoin may not be right for everybody, including you.

In the financial world, very few assets are as volatile as Bitcoin. This digital asset routinely experiences DRAMATIC fluctuations in price. As an example, Bitcoin can rise or fall by more than 50% in a very short period-of-time. Over the last four years, it’s experienced two different price declines exceeding 60%! If you’re not prepared to experience dramatic decreases in value and continue owning it, then we advise against holding Bitcoin. That said, it’s also been the highest performing asset class over every four-year period since it’s inception 15 years ago.

We view Bitcoin as a long-term hold, and for those who can stomach the volatility, we would recommend an allocation of up to 2%. We believe this reflects a cautious, but open approach to Bitcoin. It acknowledges the potential upside of Bitcoin as an asset class, while limiting exposure to its volatility.

In arriving at a maximum recommended allocation of 2%, we weighed the impact of a complete and total 100% loss, as an extreme worst-case scenario; against the possibility that Bitcoin even partially replicates its historical return. Over the last five years, Bitcoin is up over 1,100 percent. Just to be clear, we do NOT expect that pace, or anything close to it, to continue in the future!

The single most important element of any decision to move forward with a Bitcoin allocation is an investor’s commitment to continue to hold it no matter how much the price declines. The Bitcoin community uses an acronym to describe investing in Bitcoin; it’s HODL, which means “Hold On for Dear Life.”  If a massive decline in price on a 2% position in Bitcoin would cause you to sell your position, then the single best move you can make is NOT to include it.

Because it’s unique and different, and because of its EXTREME volatility, Bitcoin will not be included in your portfolio without your consent. If you would like to include a Bitcoin position, please reach out to your Financial Advisor. If you have questions and would like to discuss it further, your Financial Advisor can provide additional information.