This article was originally published in the "Guide to Wealth: Diving into Bitcoin" (Guide to Wealth: Diving into Bitcoin), a special report of "Baron" magazine published by "Wall Street Journal". This is the second article.

What skills do you need to master to get involved in Bitcoin?

Original Title: The Smart Way to Wade Into Bitcoin

By Nicholas Jasinski

Translated by Shirley Su

Whether it's a fad or a scam, it's getting harder and harder to take Bitcoin lightly, and even some longtime skeptics have to concede that cryptocurrencies aren't going away. Digital assets are rapidly entering the mainstream, financial advisors are constantly getting questions from clients, and investors want to learn more about this fast-growing asset class.

Prominent investors such as Paul Tudor Jones and Stanley Druckenmiller have said they are adding bitcoin to their portfolios in 2020, while institutions such as Fidelity Investments and Morgan Stanley are offering bitcoin on their platforms. Advisors and wealth management clients provide access to buy bitcoin.

Despite the market enthusiasm, it is still in the early stages of professional investor acceptance of cryptocurrencies. According to a recent survey by Bitwise Asset Management, about 9% of consultants manage client portfolios that include cryptocurrencies, while 24% of consultants themselves own encrypted assets. Four out of five advisors received inquiries about crypto assets from clients in 2020, and 17% of them plan to invest through client portfolios in 2021. “We’re at an inflection point,” said Ric Edelman, longtime advisor and principal of RIA, a digital asset council that provides educational resources for advisors on blockchain technology and virtual currencies. 'Why invest in Bitcoin?' and now the question has become 'Why not?'" Ric said.

Bitwise professional investors’ attitude towards cryptocurrencies

Joking aside, there are pros and cons to investing in Bitcoin or not. One of the reasons to choose to invest is to start the journey of Bitcoin and other virtual currencies.

Some investors see bitcoin as a venture capital investment -- as if they're betting on an emerging technology that will change the way people buy goods and services and send money internationally -- a scenario similar to that seen with credit cards or digital payments. Boom's initial investment in Visa (ticker: V) or PayPal Holdings (ticker: PYPL). Other investors see it as inflation-proof “digital gold,” while others enrich their portfolios by investing in an uncorrelated asset. Whatever the reason, keep the following in mind:

Start small. Regardless of the reason for buying cryptocurrency, setting an investment percentage of 3% or less can help investors prepare for volatility. Weekly fluctuations of 10% or 20% or more are not uncommon in the Bitcoin world. Assets with large swings do not need to be a large percentage to have a significant impact on a portfolio's return. And in the worst case scenario, assuming the price of Bitcoin goes to zero, a few percentage points will not completely destroy the investment of investors or customers.

At the same time, the positives of this behavior far outweigh the negatives. Since its inception in 2009, the return rate of Bitcoin has reached 500,0000%. Although such a skyrocketing momentum cannot be replicated, under the background of the bull market, the long-term growth prospects of cryptocurrency still far exceed its current performance. Compared with the long-term return rate of the stock market with an annualized rate of a few percent or tens, the growth potential of Bitcoin can be as high as "5 times" or even "10 times."

IEQ Capital is a California-based asset management and financial advisory firm with $12 billion in assets under management. The firm recently began adding 1% to 3% to its bitcoin investments, targeting clients who accept risk and want to hold crypto assets. In all investment portfolios of IEQ, 80 million US dollars has been invested in the Bitcoin field. Lianhe CEO Eric Harrison believes that this investment can be doubled or tripled in the near future.

Harrison believes that as more institutions and investors adopt cryptocurrencies, the price of bitcoin will continue to rise. He pointed out that the total supply of Bitcoin is capped and that a large portion of Bitcoin has not changed hands in more than a year. He said that "the amount of bitcoin that is actually being traded - similar to the issued shares of a company - is very small. Institutions, enterprises andcapital managerThis intensifies buying, which ultimately leads to an imbalance between supply and demand in a market where the size of the vacancy can be substantial. "

A March analysis by BofA Securities said net inflows worth $93 million could boost bitcoin’s price by 1%. It would take more than 20 times that to raise gold to the same level.

Institutional acceptance doesn’t mean Bitcoin’s price won’t take another plunge. Due to various hidden dangers, such as government regulation or outdated technology, Bitcoin remains a high-risk asset with an uncertain future.

Consider Bitcoin's non-correlation. With no way to capture value from cash flow or other fundamentals, the future price movement of Bitcoin will always be a point of discussion. However, apart from strong cross-market pressures during the March 2020 period, the price of Bitcoin should have no relationship to the performance of any stocks, bonds or commodities. In other words, even if Bitcoin's future returns cannot reach its historical heights, investing in this currency may reduce risks, increase the Sharpe ratio, and enrich investment types.

According to data released by Jim Paulsen, chief investment strategist of the investment institution Leuthold Group, from the beginning of 2018 to November 2020, Bitcoin and the stock market have only a 0.11 correlation. In comparison, bonds and stocks have a correlation of -0.24, and gold and stocks have a correlation of 0.31 (a value of 1 represents a perfect positive correlation, -1 a perfect negative correlation, and 0 a complete lack of correlation). During the same period, Bitcoin’s correlation with bonds remained below the -0.01 level.

Accept volatility. Bitcoin’s intense volatility has discouraged many investors from entering the cryptocurrency space, but we can look at volatility from another angle.

"A lot of people look at Bitcoin's volatility and think 'I don't want to be in this.' I don't buy that," Paulsen explained. )."

Paulsen and Edelman recommend that investors formulate a clear and definite plan for the proportion of Bitcoin in the investment portfolio. For example, suppose an investor sets the weighting at 2%. When Bitcoin falls and the ratio drops to 1.5%, investors should add Bitcoin to bring the ratio back to 2%. Similarly, when the currency price rises and the matching ratio rises to 2.5%, investors should sell some Bitcoins to keep it at the 2% level. This strategy guarantees investors long-term profitability as long as the general trend of Bitcoin remains upward. Take advantage of Bitcoin's volatility rather than just seeing it as a sign of risk. But the disadvantage of this strategy is that investors need to trade frequently, and the accumulated handling fees will be relatively high.

Investors can also adopt the cost averaging method: Instead of investing all 2% of the principal in Bitcoin in a single transaction, they choose to build positions smoothly on a three-, six-, or twelve-month cycle to eliminate potential shocks .

Edelman believes that as an asset class matures, its volatility narrows. "As more and more institutions start to hold Bitcoin and the price of the currency rises, it is reasonable to expect that Bitcoin's volatility will become more stable." will disappear."

Select a product. Meanwhile, advisors who want to invest in bitcoin on behalf of their clients still face operational hurdles. Adding bitcoin to a client's portfolio, collecting a service fee, and completing the logistics of recording and filing taxes is not as simple a process as buying a stock or bond. But the process is being simplified.

As the first major institution to offer bitcoin services to advisors and capital managers, Fidelity currently supports custody, trade execution and reporting functions, and plans to add ETH, a currency based on Ethereum technology, to the platform this year. Recently, Fidelity also submitted an application to the US Securities and Exchange Commission (SEC), hoping to create a bitcoin exchange-traded fund (ETF).

Tom Jessop, President of Fidelity Digital Assets, said, "Our core goal is to ensure that institutions can safely store and trade any kind of digital assets. This has become commonplace for traditional institutions. At present, most people's interest stays in Bitcoin. This Currency is also our starting point, but we currently know very little about this asset.”

Morgan Stanley recently opened a bitcoin fund to select wealth management clients, while reports said that JPMorgan Chase (ticker: JPM) plans to launch cryptocurrency-related services. Following in the footsteps of Northern Trust (codename: NTRS), Bank of New York Mellon (codename: BK) announced in February this year that it will soon provide custody services for Bitcoin and other encrypted assets. Coinbase, a newly listed cryptocurrency exchange, has been providing this service to institutional investors since 2018. Many other cryptocurrency-focused exchanges are not yet able to meet the compliance and custody requirements of most investors.

Some governments allow individuals to buy assets not listed on traditional exchanges, and local wealth advisors are able to choose off-exchange transactions. Grayscale has launched several publicly traded trust products, the two largest of which are Grayscale Bitcoin Trust (GBTC) and Grayscale Ethereum Trust (ETHE), while Bitwise has launched the Bitwise 10 Crypto Index Fund (BITW ), the fund tracks the top 10 cryptocurrencies by market capitalization. These products, like other securities, should be available to most managers. But they are structured more like mutual funds than ETFs. It’s also worth noting that Grayscale’s crypto trust product charges a 2% management fee, which is higher than most passive income instruments on the market.

Some advisors can start their crypto journey through separately managed accounts or all-inclusive asset management plans, while clients of high net worth or accredited investors have various other avenues. "There's really no reason for advisors to say 'I'm going to wait for an ETF,' because they don't have to wait," Edelman said.