The Case for Investing in Bitcoin During Crypto Winter

The cryptocurrency still has an important role in a diversified portfolio.

AccessTimeIconJul 21, 2022 at 12:50 p.m. UTC
Updated May 11, 2023 at 7:10 p.m. UTC
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Winter has come to the land of bitcoin (BTC). This is my second “bitcoin winter,” and I expect to endure more such seasons in the future.

In these frigid times, clients may ask their advisors why they recommend owning one of the most volatile major assets in history. These clients don't tend to mind the volatility on the upside, but they can lose their nerve on the way down.

For that reason, sometimes all they need is a reminder about how the strengths of bitcoin – and long-term benefits of owning it – could greatly outweigh the risks.

Bitcoin is a survivor

Since its inception, bitcoin has collapsed in value by over 50% half a dozen times. And of those times, four led to sustained crypto winters.

Bitcoin, however, has managed to rebound successfully from all of the crypto winters prior to the most recent downturn. That gives us confidence that bitcoin can survive yet another slide.

And bitcoin, in particular, has been more resilient throughout changes in seasons than any other project in the crypto market.

Take a look at the top 20 digital assets at the moment. Now wind the clock back just five years to the onset of the last bull market. How many of the top 20 tokens then remain on the leaderboard? How many of them have ever returned to their former glory, relative to bitcoin, over two price cycles?

Stratis, bitshares, bytecoin, golem, steem, saicoin, bitconnect … these coins don’t even trade within the top 100 by market cap anymore. A historical snapshot shows that even the top 10 tokens by market cap have endured tremendous fluctuation over the recent years.

Of all the digital assets that people trade today, bitcoin has remained the largest by market cap since its inception over 13 years ago. All the while, it has delivered attractive investment returns over every historical five-year period.

Bitcoin enhances a portfolio

Speaking of historical returns, when I published “Why Buy Bitcoin” in 2019, I included an analysis of the risk and return benefits of including bitcoin in a diversified portfolio based on historical price data.

Modern portfolio theory supports the idea that “the whole is greater than the sum of its parts.” Bitcoin, together with other diverse assets, could help protect investors against – and let them take advantage of – an array of economic scenarios.

Even after the recent drop in bitcoin's price, analysis still supports the benefits of bitcoin's inclusion in a diversified portfolio. The numbers are clear – bitcoin has added value to diversified portfolios.

Bitcoin outscores gold

While bitcoin offers numerous ways to win as an investment, the clearest case is as "digital gold."

Like gold, bitcoin is a monetary asset and store of value. Bitcoin shares the characteristic of scarcity that people love so much about gold.

But when measured against many of the most important characteristics of money, bitcoin has a number of advantages over gold, including transferability, divisibility, whether it can be seized, security and privacy.

We can send bitcoin electronically in unlimited amounts, unlike the case with gold. We can easily divide it up into small increments, unlike a gold bar. While bitcoin is still nascent and not immune to cyberthreats, it can be held securely in an encrypted digital wallet as opposed to gold bars that are difficult to safeguard. And, unlike gold, bitcoin can be exchanged without banking and governmental intermediaries that directly monitor payments.

One additional advantage of bitcoin: At less than 4% of gold's total value today, bitcoin still has further room to run.

Bitcoin lets people be their own bankers

Most clients of financial advisors aren’t ready yet to hold their own bitcoin. They would rather hold it as part of an exchange-traded fund, for example, than purchase it on a crypto exchange.

But, over time, many of these clients will become visionaries and be more inclined to buy and hold bitcoin themselves. In anticipation of economic turmoil in the future, they will recognize the value of having some portion of their net worth in an asset that is extraordinarily difficult to seize and that can be moved to any place that has an internet connection.

Because bitcoin doesn’t require intermediaries that possess the asset, everyday people can maintain possession of it, unlike with fiat money that is susceptible to bank runs during extreme economic scenarios.

The real risks

People ask me what would change my mind about bitcoin as an investment. For a full treatment of this topic, you can find 40-plus pages of risk factors in “Why Buy Bitcoin.”

But there are really only three that advisors and their clients should focus on in the near term.

1. Technical failure of the system

One of the few events that could cause me to change my investment thesis on bitcoin is a technical failure of the system. If the Bitcoin network stops cranking out blocks of transactions regularly, that's a major red flag.

This hasn't happened in the five years I've been watching bitcoin closely. But if it does, I'll reassess.

2. Regulation

Is tougher regulation coming for digital assets? Undoubtedly.

That's why, from a regulatory standpoint, there's never been a better time to own bitcoin.

I'm no securities lawyer, but my analysis indicates it's the only major digital asset that is unambiguously not a security based on the securities industry standard Howey Test. U.S. Securities and Exchange Commission Chairman Gary Gensler seems to agree.

3. Government rectitude

If you think the Federal Reserve is going to push the economy into a depression to flush out the debt that has accumulated over the past eight decades, then you might want to avoid hard money assets like gold and bitcoin. Dollars will be king.

But if you think the powers that be would prefer not to bring on a second Great Depression and that the far more likely path to dealing with the debt is inflation, then bitcoin probably has a role in your clients' portfolios. In my view, governments will struggle to contain inflation in the 2020s – so much so that bitcoin may become the most important major asset in clients' portfolios.

If that scenario unfolds, financial advisors will find themselves struggling to explain how they missed the most important major asset of the decade.


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Andy Edstrom

Andy Edstrom, CFA, CFP is a financial advisor and head of Swan Advisor Services at Swan Bitcoin. He is the author of "Why Buy Bitcoin" and a contributing writer for CoinDesk's Crypto for Advisors newsletter.

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