Using Bitcoin to diversify your portfolio? Read this

Cryptos have been rising and falling largely in line with other risk assets.

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Key points

  • The Bitcoin price is down, in line with losses posted by the tech-heavy Nasdaq 
  • Analysts say the crypto market was surprisingly resilient following last week's Terra stablecoin meltdown 
  • The arrival of institutional investors into the crypto space since 2018 is changing the market 

The Bitcoin (CRYPTO: BTC) price has just slipped back below the psychologically important US$30,000 level.

At time of writing, the world’s biggest crypto by market cap is trading for US$29,995 (AU$42,904). That’s down 3.4% since this time yesterday.

Though with the token’s notorious volatility it may be significantly lower or higher by the time you’re reading this.

Bitcoin and cryptos behaving like risk assets

The decline in the Bitcoin price today follows another retrace in risk assets, with the tech-heavy Nasdaq dropping 1.2% yesterday (overnight Aussie time).

And this, says David Donabedian, chief investment officer of CIBC Private Wealth Management, bodes poorly for investors buying Bitcoin to diversify their portfolios.

According to Donabedian (quoted by Bloomberg), “I think it will continue to trade with the equity market and risk assets. That’s the big lie that’s been exposed, the idea that it’s some new asset class that’s going to help diversify your portfolio has been blown to smithereens.”

How the crypto market has changed

Last week crypto investors faced a challenge not seen before.

Namely, the near total collapse of algorithmic stablecoin TerraUSD (CRYPTO: UST). UST was intended to be pegged to the US dollar but plunged to 30 US cents when investors lost confidence in the crypto and its supporting token, Terra (CRYPTO: LUNA).

Luna was meant to help keep UST pegged right at US$1 by enabling investors to swap UST for US$1 worth of LUNA at any time. But that plan didn’t hold up as the LUNA price absolutely evaporated.

Last Monday, 9 May, LUNA was worth US$66.50. At the time of writing the token is trading for 0.021 US cents.

The fallout has wiped more than US$300 billion from the total market valuation of all cryptos. Bitcoin itself plunged to US$26,350, according to data from CoinMarketCap.

But analysts point out it could have been much worse.

“We have witnessed the rapid decline of a major project, which sent ripples across the industry, but also a new found resiliency in the market that did not exist during the last market downswing,” says Changpeng Zhao, CEO of Binance Holdings (quoted by Bloomberg).

eToro’s crypto expert Simon Peters notes that the biggest shift in crypto markets has been the arrival of institutional investors adding Bitcoin and other top tokens to their holdings.

According to Peters:

The last time the market faced adversity like this was the collapse of 2018. But the makeup of the market is very different today than four years ago. Institutional investors now make up a much bigger proportion of the market, which has already had an observable impact upon not just prices, but the way the market moves.

What investors will now be considering, is how these players will help support levels moving forward. With deals from major global financial institutions going ahead, the potential is there for the sector to keep bubbling away, despite difficulties around valuations.

Indeed, perhaps it’s the arrival of institutional investors into the crypto space that’s seeing Bitcoin move in line with risk assets, making it a potentially poor asset to help diversify a share portfolio.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Bitcoin. The Motley Fool Australia has positions in and has recommended Bitcoin. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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