The price of Bitcoin (CRYPTO: BTC) is yet again on everyone's lips. The largest cryptocurrency by market capitalisation hit a new record high of more than US$61,600 in the early hours of this morning (our time).
That means Bitcoin is now up almost by 28% over the past month and more than 1,000% over the past year.
There's no need to state that Bitcoin is now by far the best performing 'mainstream' asset class over the periods. It has eclipsed everything from ASX shares to US shares to gold, bonds and property.
So what's going on here? Why are investors still being drawn into Bitcoin? Is it just FOMO all over again?
A report from The Australian Financial Review (AFR) this morning offers an interesting insight. The AFR argues that the mammoth US$1.9 trillion stimulus package that was recently signed into law over in the United States could be having an impact. The report points out that Americans started receiving their US$1,400 stimulus cheques over the weekend after the bill cleared US President Joe Biden's desk last week.
That has walked hand-in-hand with US government bond yields rising to their highest levels since the middle of the coronavirus pandemic last year.
Rising bond yields indicate that the markets are worried about inflation, since higher yields imply future interest rate hikes. This could be the key here. Bitcoin is viewed by many investors as having inflation-resistant characteristics. That's due to the finite number of coins that can be mined.
Should you invest in Bitcoin?
That depends on your outlook for the future of Bitcoin of course. As we reported last month, many fund managers are now treating Bitcoin as a legitimate asset class in the same vein as shares or bonds. We have also seen companies like Tesla Inc (NASDAQ: TSLA) and Square Inc (NYSE: SQ) begin to actually hold Bitcoins on their balance sheets alongside cash.
If the extreme volatility that Bitcoin displays spooks you though (very understandable), there is nothing wrong with giving Bitcoin a pass and sticking to ASX shares. A 'third way' to consider adding exposure is by dedicating a small, fixed portion of your portfolio to Bitcoin (and/or other cryptocurrencies), then 'rebalancing' when this allocation is surpassed or undershot.
For example, you could decide that you want 2% of your portfolio's value to be held in Bitcoin. If Bitcoin continues to rise and this 2% grows into 3%, you could sell some off in order to return to your 2% target. If it dips to 1% you could conversely top it up.
There's no right answer here. But one thing seems certain. Bitcoin doesn't seem to be going anywhere anytime soon.
