Does Bitcoin have a place in your portfolio?

Want to own Bitcoin but don’t know how to incorporate it into your portfolio? You’re not alone, as investors worldwide continue to grapple with what seems to be the cryptocurrency’s growing legitimacy as a bonafide investment. But fear not, there’s a way to ease yourself in without going over your head, says Scotia Wealth advisor Greg Newman, who likes Bitcoin as both a trade and a (risky) long-term play.

“Bitcoin is the kind of asset class that drives people nuts because it’s either going to go up a lot from here and become a real mechanism for exchange that the world relies on or it’s going to be a passing fancy that, say, you bought it at $50,000 and three years from now it’s like, ‘Oh, that wasn’t a very good idea,’ and it’s down to $500,” said Newman, director of wealth management at Scotia, who spoke on BNN Bloomberg on Friday.

“This can happen — it was trading at a cent 12 years ago,” he said.

“It’s this binary thing that I think investors are very, very scared of,” Newman said. “However, there really is a fear of missing out if this is the new phenomenon, and it’s looking like it will become that if it gets widely adopted and accepted enough. Elon Musk was certainly a shot in the arm.”

Bitcoin kept up its torrid pace over the weekend while the rest of the market slept, hitting a record US$61,781.83 before pulling back to around $56,000 by early Monday. The token’s rise in recent months has been nothing less than phenomenal, going from $10,000 as late as October of this past year before hitting $40,000 by January and then $50,000 by mid-February.

Bitcoin has been portrayed as an alternative place to park some cash during the uncertainty of the COVID-19 pandemic. Compared to an over-heated stock market and the chump change available in bonds, investors have taken to Bitcoin in greater numbers than during the first cypto-mania of 2017.

The difference now, however, is that cryptocurrency ETFs have established themselves, making it much easier for the average investor to participate than during the first wave, where dodgy internet exchanges and back-alley Bitcoin ATMs were the mode du jour.

And it hasn’t hurt to have companies like payments companies like Visa and PayPal warming to Bitcoin, not to mention innovation gurus Elon Musk who early in February revealed that his company Tesla had bought $1.5 billion of Bitcoin in January, setting off a new round of crypto-buying.

“We expect to begin accepting bitcoin as a form of payment for our products in the near future, subject to applicable laws and initially on a limited basis, which we may or may not liquidate upon receipt,” Tesla said in its 2020 annual report.

But even with its growing acceptance, investors are understandably skittish around Bitcoin, as its eventual and general use as currency is still a big question mark both on practical and principled grounds, while being untethered to any physical commodity has also kept in it in the realm of the speculative.

But Newman said holding Bitcoin could have a place in a portfolio, even if still a risky purchase.

“I feel that you need insurance to own some of this, just in case it gets away from you and it just keeps going up,” Newman said. “The way I’m doing that for people who don’t mind the risk is to decide up front how much you want to own and then buy it in stages.”

“As to when you sell something like that, it depends on what you want to do. If you want to trade it, I think this is a great trading vehicle, but if you really want the story and the insurance of what happens if this thing really, really becomes a bit of a global exchange, I would just not even think about selling at this point. I would just buy it for that risk capital, accumulate it, put it away and see what it does,” he said.

“Definitely, own it in a taxable account because it is something that’s very binary and it’s either going to work or it’s not,” Newman said.

Last week, the Toronto Stock Exchange (TSX) brought out its third Bitcoin exchange traded fund in CI Galaxy Bitcoin ETF, making it the third Canadian Bitcoin ETF to launch, all coming over the past month. Both the Evolve Bitcoin ETF and Purpose Bitcoin ETF launched in mid-February and both of those are up slightly from their debut. So far, the three are the only North American Bitcoin ETFs, with US regulators having yet to agree to the idea. Bitcoin passed in February the US$1-trillion mark in total value for traded coins.