An industry group representing certified financial planners has found that bitcoin can be a beneficial addition to investor portfolios.
In the new report, the Financial Planning Association (FPA) asserted that for many investors, bitcoin represents a potential opportunity that could both diversify and boost the efficiency of a portfolio.
The FPA study compares the performance of bitcoin markets with other major asset indexes, concluding that though bitcoin does not demonstrate the attributes of a successful currency, the act of trading and investing digital currency can be profitable.
The FPA noted:
“Trading and investing in a virtual currency, such as bitcoins, is readily accessible to individual investors. Uncertainty regarding taxation of bitcoin transactions has been ameliorated with new IRS tax guidance. Given these observations, and the conclusions from the empirical analysis, individual investors can benefit from holding a small amount of bitcoins in a diversified portfolio.”
While the report is largely positive about digital currency, it did deem bitcoin “a very illiquid financial asset”, underscoring its finding that digital currency investments are still highly risky.
Based in Denver, Colorado, the group represents financial planning professionals around the globe. The FPA has chapters in more than 30 countries worldwide and claims nearly 24,000 members.
Risky business
The study compared bitcoin to both fiat currencies like the US dollar, the Japanese yen and the Swiss franc, as well as assets like gold, property and both stocks and bonds. The results suggested that in the context of portfolio management and financial planning, bitcoin may present a welcome – though risky – opportunity.
For example, the FPA report found that bitcoin had a low correlation with the performance of other non-currency asset classes. Additionally, none of the other asset classes appeared to have an impact on the price of bitcoin.
The report stated:
“This indicates that bitcoins could serve as a potent diversifier for an investment portfolio.”
The FPA findings also suggested that bitcoin may enhance the efficiency of a portfolio. The study utilized two mock portfolios, one including bitcoin and one excluding the digital currency.
The report noted:
“Comparing [the data] also demonstrates that portfolio returns are higher, and the risk (probability) of incurring a loss is much lower, when bitcoins are added to an investment portfolio with every portfolio optimization measure examined. Hence, the analysis demonstrates that adding bitcoins to an investor’s portfolio does enhance efficiency.”
Given the risks involved, the FPA clarified its position by saying that it is not explicitly endorsing bitcoin as worthwhile investment. Instead, the group sought to show that digital currency does have a place in investment if handled correctly.
Group urges small investments
Despite the possible benefits, the FPA said that investing in bitcoin should not be taken lightly, and that financial planners should limit their clients’ exposure to digital currency holdings.
The FPA wrote:
“It is important [for financial planners] to underscore the risk involved with investing in these assets. Bitcoins should only be held as a minor component of a well-diversified portfolio, such as in a market-weighted basket of major asset classes.”
The report also included information for financial planners who have clients that wish to get involved with bitcoin. Echoing warnings from government organizations like the Securities and Exchange Commission (SEC), the FPA said that investors need to be careful about where and how they buy their bitcoin.
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financial planning
Original author: Stan Higgins