HUAI’AN, CHINA – NOVEMBER 11, 2024 – Bitcoin gift commemorative coins are displayed in Huai ‘an, … [+]
Hindsight is 20/20 and if we could go back in time, our portfolios would likely have heaps of Nvidia, Tesla and — you guessed it — Bitcoin.
The latter’s meteoric rise has left a number of investors in various states of emotion. Some have been euphoric, while others are regretful thinking back to times when Bitcoin was trading for just a few thousand dollars. Heck, even the sub-$30,000 prices throughout 2023 were a bargain in hindsight.
However, that’s the problem with hindsight: Everything seems crystal clear, even when that wasn’t the case at the time. Perhaps in no other endeavor is that more true than when it comes to investing.
A Little Bitcoin Has Gone a Long Way
I remember talking with a wealth manager friend of mine several years ago as they tried to juggle giving advice on Bitcoin at a time where their firm did not offer exposure to cryptoassets. They conceded that while they didn’t necessarily believe in Bitcoin, that small exposure (for instance, 5% or less of their portfolio) could be reasonable for investors who do believe in Bitcoin’s potential.
I took a look at what that kind of exposure would mean for an investor’s portfolio, and you know what? A little bit of Bitcoin has gone a long way for those who took the risk.
Returns generated with Portfolio Visualizer. Data tracks from 1/1/2014 to 12/31/2024
In our example portfolio, we only allocated 5% of its assets to Bitcoin and put the rest in the S&P 500, while the other portfolio was composed of 100% S&P 500 exposure. At the time, some investors felt that even risking something between $100 and $500 on a $10,000 portfolio (a 1% to 5% allocation) was like throwing money away.
Looking back though, that “risk” feels so minuscule — now.
Digging Into the Details
In our example, a $10,000 portfolio would have grown to more than $65,000 with the Bitcoin allocation vs. a portfolio value of roughly $34,000 under the all-stock approach. In other words, the cumulative return for that portfolio more than doubled vs. the portfolio that was composed of 100% stocks (554% vs. 238%).
Don’t get me wrong, turning $10,000 into more than $30,000 in a decade is stellar work, regardless of other what-ifs. However, to see such a massive change in performance due to a small allocation in a risky asset really underscores the long-term compounding effects when that asset turns out to be a huge winner.
From a drawdown perspective, the all-stock portfolio suffered a maximum decline of nearly 24% as a result of the 2022 bear market. However, the portfolio with the 5% Bitcoin allocation only suffered a maximum drawdown of 25.6% (which occurred during the same period).
And had Bitcoin gone to zero? Well, here’s the fun part. Even with a total loss on a 5% Bitcoin allocation, the portfolio still would have generated a compound annual growth rate of 12.6% — just slightly below the 13% CAGR of the all-stock portfolio.
Looking back, those who allocated a small percentage of their portfolio to Bitcoin faced two major risks: The existential risk that Bitcoin declined toward zero and the added volatility of the cryptocurrency as it ebbed and flowed for the past decade.
The 10-year monthly performance for Bitcoin. Source: eToro, Bloomberg
In hindsight, most investors would have gladly accepted what turned out to be less than two percentage points of additional downside risk in exchange for more than 300 additional percentage points on the upside. The added volatility? Well, that would have been harder to stomach.
What Good Is Hindsight?
The point here isn’t to make people feel bad about Bitcoin — or really, any other asset or stock that has done exceptionally well over the past five to ten years. Instead, the goal here is to rethink risk — not in a way that attempts to justify an unnecessary gamble, but in a way that results in taking a calculated risk when investors have strong conviction.
For every Nvidia or Bitcoin there are dozens or perhaps hundreds of investments that failed to work out. In that context, investors shouldn’t take a shot on everything they see trending on social media.
To get that conviction, they need to approach the markets with an open mind and do the research. If after all of that, investors feel strongly about a specific asset or holding, they can approach it with a bite-sized amount of risk. If it completely fails, it won’t cost them all of their hard-earned savings. But if it pans out — like Bitcoin did — it could drastically enhance their long-term returns.
