An investor with a sophisticated portfolio strategy typically has a 60/40 stock to bond portfolio allocation, or perhaps a 55/35/10 stock/bond/gold allocation. How does bitcoin fit into modern portfolio theory where investors seek to maximize risk adjusted returns and minimize historical portfolio drawdowns? 

Unlike what most financial advisors are taught to tell you, bitcoin is extremely complimentary to your portfolio in accordance with Modern Portfolio Theory and any sophisticated investment strategy. Here’s how: 

How bitcoin strengthens your portfolio 

Bitcoin risk adjusted performance dramatically outperforms the S&P 500 

Bitcoin has a better risk adjusted return than the S&P 500, gold and bonds. Risk adjusted returns factor in volatility to an asset’s performance. Despite bitcoin’s volatility, its superior returns make it an objectively more favourable asset than the S&P 500. 

Bitcoin is weakly correlated to stocks and bonds, dampening portfolio volatility

Bitcoin’s low asset correlation minimizes portfolio drawdowns and increases the diversification and stability of returns. Bitcoin helps your portfolio weather declines and reduce overall portfolio risk. 

Unlike other assets, the cost and fees to hold bitcoin is zero 

Most financial assets have annual carry costs exceeding 50 bp annually, severely limited by portfolio potential. In the same manner as compounding interest results in large gains over the distant future, compounding fees remove substantial portfolio gains from the distant future. Thus, investors ought to pursue low annual fee investment strategies. The cost to move and store bitcoin is near zero, lower than any institutional grade investment. 

Bitcoin preserves capital better than other asset 

Since the cost to own bitcoin is essentially zero, bitcoin can be held for an indefinite amount of time without any capital degradation. When it comes to capital retention, bitcoin is unmatched in its efficacy. 

To summarize so far.. 

Bitcoin is better performing than, has lower performance adjusted risk, has lower carry costs than any other investment asset, all the while bitcoin has an increasingly negative correlation that enables diversified investors to weather portfolio drawdowns. 

What makes bitcoin so unique? 

In addition to its impressive financial performance metrics, bitcoin benefits from a unique mix of commodity and governance properties that are arguably more attractive than its historical appreciation. Like gold or the internet itself, bitcoin is decentralized, meaning there is no one in charge. Facebook, has a clear CEO and corporate structure; facebook has a clear hierarchy of accountability and control that represents a single point of failure. Bitcoin is decentralized, it does not have a central point of control or decision making body. Decentralization is Bitcoin's greatest strength and its most powerful characteristic. 

What does it mean to say “Bitcoin is decentralized”? 

Bitcoin runs on software maintained by tens of thousands of individuals around the world, each checking in on the other (and everyone else) to ensure bitcoin’s rules are maintained. This is a “Decentralized” structure meaning there is no CEO, or anyone in charge, rather Bitcoin is a network of distributed individuals and code that flawlessly harmonize to create a robust, secure system for holding and moving around bitcoin. 

Decentralization means that bitcoin’s current state is very difficult for anyone to change without rallying the entire community toward a particular direction. As a result, it is impossible for large state actors, like a government or military, to shut down the bitcoin network or hack any wallet. Thus, bitcoin is essentially unstoppable and immune to counterparty risk. 

Why does decentralization matter? Non Confiscatable & Permissionless

In 1932 when the U.S. seized gold, they were able to do so because it was within their jurisdiction. When the Nazis invaded European countries, they took their gold because it was (then) within their jurisdiction. When North Americans donated cash to the Canadian Trucker protest, their bank accounts were frozen because they were within the government’s jurisdiction. Governments can however seize your bitcoin when it is held on a custodial exchange, like Coinbase. But we don’t need custodial exchanges, bitcoin was invented so YOU could be your own bank. Bitcoin held in a bitcoin wallet cannot.

Unlike traditional fiat money, bitcoin is not reliant on centralized payment providers and banks to enable everyday folks to transfer money. Bitcoin is transferred peer-to-peer, approved by the network of individuals who also remove invalid transactions. When transacting bitcoin, there is not need to ask for permission to move money of a certain value or to a certain location. As long as the transaction is valid, the bitcoin network will facilitate it. Governments cannot stop a bitcoin transaction. 

Why does decentralization matter? Asset scarcity and fixed issuance schedule

Bitcoin does not have a CEO that decides where the network will allocate resources, resources (like new bitcoin) are automatically allocated as part of a process call Proof of Work Bitcoin Mining. Basically, this system was invented so anyone can freely and equally compete to earn new bitcoin entering the system. Unlike money printers that are controlled by a central bank, anyone can compete to mint new bitcoin. This process is regulated by an ever adjusted computational sort of race. The parameters of this race are both public and unchangeable. Thus, bitcoin has a fair, unchanging and transparent monetary policy. The result is that bitcoin is scarce and immune to any form of inflation or debasement. 

Did I miss bitcoin? Is bitcoin’s growth over? 

No, bitcoin is not done growing as its total addressable market is uniquely large. Bitcoin is decentralzied, so there are no centralized barriers fixing bitcoin to a particular country, language or financial class. 
Bitcoin as an asset class is still in its infancy. Since bitcoin is in direct competition with fiat currencies and inflation combating assets, like bonds and real estate, bitcoin’s total addressable market is still several hundred times larger than bitcoin's current standing. 

Additionally, billions of individuals are unbanked due to the fact that they can’t provide banks with enough money for banks to justify providing them their service. As a result, billions are without a financial system to save and transfer money forcing them to barter and save in livestock or crops, resulting in massive financial inefficiencies. Bitcoin provides an alternative banking system, boosted by the earlier mentioned fact that bitcoin is free to set up and there is zero cost to store bitcoin. 

Conclusion

Bitcoin’s total addressable market is every single citizen on earth, and every under-productive financial asset within the global financial system. Bitcoin has more attractive financial metrics than any other major asset, while bitcoin also boasts the least expensive carry costs of any asset. Bitcoin is the only savings technology invented in and for the 21st century. 

To get started with bitcoin, visit https://bitcoinwell.com/signup