Bitcoin has had impressive returns in 2017 and it remains a highly volatile asset. But volatility is a flawed measure of risk according to Investopedia.com.
"While it is true that a more volatile stock or bond exposes the owner to a wider range of possible outcomes, it doesn't necessarily impact the likelihood of those outcomes. In many respects, volatility is more like the turbulence a passenger experiences on an airplane - unpleasant, perhaps, but not really bearing much relationship to the likelihood of a crash."
Bitcoin may be volatile, but its volatility in and of itself is no indication of a market crash and, for some, the risk/reward ratio may be highly favorable.
Risk vs Reward
Evaluating your own risk tolerance is fundamental to investing. Many investors compare expected returns on an investment using the risk vs reward ratio. It is generally true that the higher the risk the higher the reward and on the other hand the lower risk the lower the reward.
When one invests in a low-risk investment, it is less likely that they will lose money, but it is also unlikely that they will benefit from aggressive growth as part of their investing strategy. If you only choose low-risk investments for your portfolio, it may take you awhile to earn a substantial profit.
On the opposite end of the spectrum high-risk investments can reward the risk-takers very well and rather quickly, taking more risk is associated with a higher expected return. It all depends on your own investment risk tolerance, financial needs and timeframe. Individual investors should never risk more money than they are willing to lose -- especially when it comes to aggressive growth investment strategies.
How to Retire Rich
In my interview with Tony Robbins, and subsequent article Tony Robbins: How to Retire Rich, we discuss 4 core principles, including core principle #4: Diversification. In order to reach your financial goals, you must create a diverse portfolio. Diversification helps reduce risk and maximize safer earnings.
Bitcoin is a new asset for investors to consider including as part of their overall diversification strategy in their portfolios. Although it is one of the riskier investments today, many believe it has a lot of room to grow and only represents a fraction of other financial assets.
Like any asset class, it's important to know the risks and understand the technical and fundamentals associated with the assets, including any correlation to other asset classes. Many believe that bitcoin in an early pioneer that represents an emerging currency market based on blockchain technology. Early investors who believe in the growth of the cryptocurrencies market are speculating that it will continue to grow over the long term.
New Government Regulations For Bitcoin
CME Group announced its plans to launch Bitcoin futures at the end of 2017 pending all regulatory review periods. CME Group is a leading marketplace for derivatives managing 3 billion contracts worth about $1 quadrillion annually and their entry into the space marks a significant regulation milestone for cryptocurrencies.
Their news also follows the SEC's attempt to crackdown on ICOs. ICOs are unregulated methods of raising funds for start ups and they have become increasingly popular, often raising tens of millions of dollars overnight. The SEC is looking at ICOs as securities and, as many scams and lawsuits are beginning to proliferate in the space, many are expecting the SEC to announce new regulations very soon.
Analysts believe the government's increased regulation and oversight of digital currencies will reduce the risk and volatility, thus enticing larger institutional investors and financial firms to jump into the space.
New Opportunities Are Creating Substantial Gains
Investing in digital currency in channels outside of cash purchases has been increasing, including adding Bitcoins to an individual's retirement account.
The leading company in the space is BitcoinIRA.com and their COO, Chris Kline, stated in an interview with Huffington Post, that demand for Bitcoin's in an IRA has "exploded." He adds that their customers were seeing incredible return this year as a result of the increased price.
Bitcoin has increased 600% in 2017 alone and many alternative cryptocurrencies, such as Ethereum and Litecoin, have seen similar extraordinary gains.
"Many believe cryptocurrency will be the next great technological innovation of their lifetime" Mr. Kline added. "They're seizing the opportunity now as a way of accelerating their retirement goals before the price the rest of the industry catches up and the prices potentially go much higher."