Bitcoin keeps wavering between a store of value and a high-risk asset. How investors square that with their traditional investments.

Published Fri, Apr 28 20234:26 PM EDT

Investors aren't sure what to make of bitcoin right now. Since the beginning of the year, the cryptocurrency has behaved as both a risk asset and a hedge against uncertainty. That's been especially true since turmoil in the U.S. banking sector began in March and returned volatility to the market. Bitcoin has soared 77% this year. Volatility (and therefore uncertainty) is a key characteristic of cryptocurrencies – at least for now. Despite what looks and sounds like institutional adoption and mainstream advancement, it's still very early days for the industry, so getting comfortable with the unpredictability is step one to being a good investor in it, according to Tyrone Ross, president and founder of financial planning firm 401 Financial. "If you make an investment into bitcoin, you understand that this is par for the course, it just is," he told CNBC. "You can dollar cost average in and hold it. Traders who have used a lot of leverage and have gotten liquidated in shorts – those folks have a whole different set of issues than those that are really looking at it as an investment. These moves should not bother you if you are really an investor in bitcoin and understand it." "Believe in the core reasons for which you put money in and hopefully there are some 'narratives' around that that you can hang on to when it gets really volatile like this," he added. Bitcoin spent much of 2022 being tied to stocks, with inflation data and Fed policy as its main price drivers. That correlation has been sliding since the beginning of this year, but bitcoin remains sensitive to the macro economy. Meanwhile, its correlation with gold spiked in early March when the banking crisis began. This week, just as crypto volatility had returned to pre-banking crisis lows , troubles at First Republic Bank reignited concerns about the health of U.S. banks and bitcoin rallied as much as 8% . Still, investors are holding their breath for the next policy decision by the Fed at its meeting next week – with many expecting a hard landing, and positioning for dollar debasement and interest rate cuts. Additionally, with so much liquidity having been drained from the market these past two months, investors aren't trusting any bitcoin rally to turn into the next great bull run. "Because bitcoin takes on a lot of asset profiles – risk asset, store of value, VC-like nascent asset class – investing in it is actually really attractive," said Greg King, CEO of investment company Osprey Funds. "Truly uncorrelated assets, with unpredictable behavior and a positive expected value, are rare jewels in terms of portfolio allocation." "Being highly volatile means that even a small allocation of bitcoin to a portfolio is enough to make the investment noticeable," he added. A very early technology play Looking at the price path on short timeframes, bitcoin will and often does mimic high-risk assets. The volatility will go away though, as it has for other new technology advancements before it, according to Mark Connors, head of research at Canadian investment fund manager 3iQ. He pointed out that over the past 10 years, bitcoin has declined from 5x more volatile than the Nasdaq in 2015 to 3x in 2019, to just 1.8x at the end of last year. "The qualities that make it an exponential grower bear out over periods of quarters and years," he said. "It's declining its volatility profile at a greater rate relative to equities," he said. "Mature assets don't have high adoption rates," he added. "People already own all the equities they're going to own. We're not going to have another 20% of people buy equities because there aren't 20% of people around to buy equities – birth rates are down, portfolios are mature." Ross had a nuanced view, arguing that bitcoin remains a highly volatile asset. BTC.CM= 1Y mountain Bitcoin over the past year For the past decade traders have tried to understand bitcoin's identity, sometimes with little patience for its newness and ability to morph from one thing to another. It was designed to be digital cash for those excluded from the formal financial system. New entrants to the market that came in the 2021 bull run were sold on the idea of a hedge against inflation. They've gotten used to it trading like a stock. "Is it pristine collateral for some folks? Perhaps," Ross said. "Is it a better currency for some folks? Yes. Is it an inflation hedge? It didn't seem like it was. Is it safety when First Republic Bank looks like it's on the brink of collapse? Sure. But it's a speculative asset that is highly volatile and benefits from a very liquid environment," he said. For Ross, it's also a technology bet. New crypto investors often overlook the Bitcoin technology, focusing instead on bitcoin the crypto asset. Ross is bullish on its ability to act as a financial system for those who can't access bank accounts. "We have a venture capital investment essentially, with liquid pricing," Connors said. "That's a combination we're not used to, so to have an understanding of it is job one. The second one is to size it appropriately so that you're not watching all the time." "Volatility is a price you pay and, as people say, price is the least interesting thing about bitcoin – although that's a hard pill to swallow," Connors added.