Gold, a safe haven for many risk-averse investors, returned approximately 51% over the past five years, the S&P 500 83% over the same period, while Faang (tech stocks Facebook/Meta, Amazon, Apple, Netflix, and Google/Alphabet) over the same period managed a total return of 237%.
Although these asset classes are much lower risk in comparison with cryptocurrencies, one cannot ignore the fact that Bitcoin returned over 4 600% over the past five years.
If we isolate per-annum, bitcoin returned 95% in 2019, 301% in 2020 and 60% in 2021.
Bitcoin didn’t just dominate a few asset classes, it outperformed every traditional asset class.
Take US real estate investment trusts (Reits) as an example: in 2019 this asset class managed to return 28.9%, while in the same year Bitcoin returned 95%. In 2020, the year the pandemic spread across the globe, US Reits underperformed by 4.7%, while Bitcoin weathered the storm to return its investors a mouth-watering 301%.
When one considers the returns generated by the JSE over the past five or even 10 years, it’s not even worth comparing.
The lesson to be learnt here is that while traditional investments (equities, cash, bonds and property) will always take up the overwhelming majority of an investor’s portfolio, the majority of investors should have some exposure to higher-risk investments, even if it’s a percent or two of their portfolio.
I would argue that the asymmetric return profile of cryptocurrencies should position the asset class as the most important investment to be included in the higher-risk portion of an investor’s portfolio.
A simple illustration is that if an investor allocated 1% of their portfolio into Bitcoin five years ago, and the remainder into ‘safe assets’ which grew by 10% year on year, the original 1% would now account for about 22% of the investor’s total portfolio. The downside of that is the investor stands to lose 1% of their portfolio if those assets fall to zero which, in my view, is highly unlikely.
The answer for investors who are wary of cryptocurrencies is to invest a small portion (as much as they are willing to lose) of their portfolio into a diversified basket of cryptocurrencies.
By making that initial leap, investors will be inclined to follow the market and develop a better understanding of an asset class that in my view is here to stay.
Jonty Sacks is a partner at Jaltech Fund Managers.