People are talking about bitcoin again. But should you invest?

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We need to talk about bitcoin BT*0 again.

I’m hearing people bring up bitcoin in casual conversations after crickets for much of 2023. And the laser eyes are back (during the pandemic many Twitter users who were all aboard the crypto hype train modified their avatars to make their eyes glow red).

Why? There are two main reasons. After the punishing drop in bitcoin’s price in 2022 (a loss of approximately 64.2 per cent), 2023 was a barnstormer with a gain of 155.7 per cent. Triple digit returns have a funny way of dulling the memory of previous spectacular crashes.

And on Jan. 10, the Securities and Exchange Commission approved the listing of 11 spot bitcoin ETFs for trading on public markets in the U.S. Previously, alternative forms of bitcoin ETFs available in the U.S. held futures contracts on bitcoin, not actual bitcoin. But these spot bitcoin ETFs will hold actual bitcoin themselves.

It’s been widely portrayed as a validation moment from part of the crypto-community. I say “part” because some see the introduction of more regulated intermediaries as antithetical to the whole “we don’t need the traditional financial system” ethos that largely fuelled the rise of bitcoin in the first place.

Spot bitcoin ETFs may face uphill battle to widen token’s appeal

These two factors have average investors once again asking, “Should I invest in bitcoin?” and “What is bitcoin?” – in that order.

If you are on the fence, then here are some points to consider.

If you are still in the “What is bitcoin?” camp, don’t worry. Many people are. It takes hours of reading to understand how bitcoin and its underlying blockchain technology are supposed to work. If you’re not interested in reading up on it, you might want to cross it off your list as a direct investment option as most experts agree you shouldn’t invest in something you don’t understand.

If you work with a financial adviser who can explain how it fits into your portfolio strategy, that’s between you and them. Note that Canadians have actually had access to spot bitcoin ETFs since early 2021, much to the envy of American crypto-enthusiasts.

If you do understand how bitcoin is supposed to work, that doesn’t automatically mean you should be an investor. You can find both cheerleaders and detractors from the experts in each of the disciplines bitcoin touches: economics, computer science and portfolio management.

Ric Edelman, author of The Truth About Crypto and founder of the Digital Assets Council of Financial Professionals, has long advocated that investors hold a 1-per-cent allocation to crypto. Given the volatility of bitcoin, low single-digit allocations seem to be the upper limit crypto-friendly investment professionals recommend if you’re going to add it to your portfolio. And that’s because while a triple-digit return can look enticing, bitcoin has been prone to enormous drawdowns, too.

While 2023′s 155.7-per-cent return was spectacular, it still didn’t bring you back to break-even if you had bought and held bitcoin since Jan. 1, 2022. After a 64.2-per-cent drawdown, the return required just to get you back to a cumulative 0 per cent would be just under 180 per cent.

One way to benefit from this extreme volatility could be to rebalance regularly but keep in mind this takes an iron stomach – it sounds easy in theory and is gut-splitting in practice. Drawdowns of 80 per cent or more are not that uncommon with bitcoin.

If you have a properly diversified portfolio, you already have exposure to crypto as some companies that make up some of the biggest stock market indexes in the world have direct or indirect exposure to cryptocurrencies. It’s important to understand that being a good investor doesn’t require direct investment in bitcoin, either through your own cold wallet or through a publicly listed ETF.

Preet Banerjee is a consultant to the wealth management industry with a focus on commercial applications of behavioural finance research.