Using Bitcoin to diversify your portfolio? Read this

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

| More on:
Concept image of Bitcoin and hand using laptop.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

More on Cryptocurrencies

a man with his back facing the camera sits at a computer displaying a screen of code with an electric power contraption on the desk near him as he sits in concentration while appearing to mine cryptocurrency.
Cryptocurrencies

Ethereum price falls after hackers begin laundering $100 million bridge exploit

Crypto bridges enable the transfer of tokens between different blockchains, but can provide hackers with opportunities.

Read more »

A shiba inu dog lying on the sand at a beach.
Cryptocurrencies

What’s going on with the Dogecoin price?

The meme token received a fresh round of support from Elon Musk.

Read more »

A young woman lifts her glasses with one hand as she takes a closer look at the news that the US SEC is ready to label Bitcoin a commodity
Cryptocurrencies

What did the SEC just say about Bitcoin?

Commodities and securities face significantly different regulations in United States markets.

Read more »

A man sits at his computer with his head in his hands while his laptop screen displays a Bitcoin symbol and his desktop computer screen displays a steeply falling graph.
Cryptocurrencies

How crypto miners are squeezing the Bitcoin price

Higher-cost crypto miners could be out of pocket more than US$20,000 for every Bitcoin they mine.

Read more »

A green-caped superhero reveals their identity with a big dollar sign on their chest.
Bank Shares

ASX 200 bank ANZ turns to crypto for carbon credit settlement

The carbon trading market is forecast to grow as the world continues work to slash greenhouse gas emissions.

Read more »

A man sits wide-eyed at a desk with a laptop open and holds one hand to his forehead with an extremely worried look on his face as he reads news of the Bitcoin price falling today on his mobile phone
Cryptocurrencies

The Bitcoin price is struggling. When will cryptos see a bottom?

Crypto investors may need to wait for the US Federal Reserve to ease the pace of its tightening before the…

Read more »

Clock with post it as a reminder of Tax Time
Tax

The ATO is collecting crypto taxes. Here are 5 handy expert tips come tax time

A number of factors will determine how much tax, if any, crypto investors need to pay to the ATO this…

Read more »

A bitcoin trader looks afraid and holds his hands to his mouth among graphics of red arrows pointing down
Cryptocurrencies

What to expect from the Bitcoin price following last week’s thrashing

Higher interest rates and bad news cycles have impacted investor sentiment on cryptos.

Read more »