Whereas investment is primarily about making money, it is equally important to have investment plans in place to make sure you don’t lose that money.*
This is not simply about locking your money up in a vault, but about coming up with a sound strategy to spread risk. And the two keywords central to any wealth preservation strategy are long-term and diversification.
- Long-term; not just in the sense of saving money for your retirement or to leave a legacy for future generations, but also in that you want to stay ahead of inflation and make sure you retain your purchasing power.
- Diversification; by far the simplest way to reduce risk and protect your wealth. Just as you would not put all your money into one company, it is best not to park your money in a single investment category. The key to diversification is to spread your wealth across multiple uncorrelated asset classes and then diversifying within those asset classes.
Apart from investing in different stocks, bonds, or parking money in another currency, high-net-worth individuals also resort to investing in real estate, fine art, rare coins or other exclusive collectables, jewelry, gold, and, increasingly, Bitcoin.
What’s so special about Bitcoin?
Throughout history, there have been cases where gold, goods, or even land have been confiscated during times of crisis. Equally unsettling, as we’re seeing in Venezuela, where people struggle with hyper-inflation, there may be times when it is incredibly difficult to move funds into a different currency, leaving people helpless as they see their life savings being reduced to pocket change.
Bitcoin is different. It is digital, borderless, it can be transferred without any intermediaries, accessed by anyone who has connectivity to a mobile device or the Internet, and all transactions are permanently recorded on a public ledger, leaving no room for dispute over ownership.
In a recent article in The New York Times, a Venezuelan economist describes how Bitcoin is becoming part of everyday life in Venezuela – so much so that Venezuela has been ranked second worldwide (after Russia) in volume of activity on a major Bitcoin exchange platform.
But it’s not just under extreme conditions that Bitcoin can be used to protect wealth. It is also a good candidate for portfolio diversification in general – and should be considered as part of a comprehensive wealth preservation strategy.
Why invest in Bitcoin?
There are a number of reasons why Bitcoin is worth considering when you’re thinking about preserving – or growing – your wealth:
- Bitcoin is a new asset class: Bitcoin, along with other cryptocurrencies, makes up a completely new asset class. While there are no guarantees, its value today is only a fraction of the markets it potentially stands to disrupt.
- Wealth is changing hands: A recent survey shows that millennials are more likely to use and invest in Bitcoin, which means that as this generation comes to its prime earning years, there is a good chance that the demand for Bitcoin will increase.
- Strong network fundamentals: As a borderless form of money, Bitcoin and other forms of digital money have a high chance of becoming increasingly common and part of mainstream payment methods.
- Bitcoin is an uncorrelated asset and in its short lifetime has already shown to act as a hedge against recession.
How can I invest in Bitcoin?
Once you’ve purchased your Bitcoin you could store your funds in a wallet of your choosing, put it in cold storage, contact us to have your funds stored and insured in a fully regulated entity, or you can choose to trade into other coins on AAX’s spot market.
AAX also features a futures market where – based on your view on the market – you can go either long or short, meaning you could even make a profit if the price of Bitcoin goes down. Learn more about this from our Futures Trading Beginner’s Guide.
Although how much you invest in cryptocurrency is completely up to you and your own responsibility, we generally recommend allocating around 2% of your portfolio to crypto.
* Protecting wealth, in this article, should not be taken to mean secreting money away in anticipation of litigation, future legal troubles, to evade tax, or any other activities that may amount to fraud.