Until recently, billionaire investors seemed to have little or no interest in buying Bitcoin (CRYPTO: BTC). But that appears to be about to change in 2024. Half of the top 20 billionaire hedge fund managers now own Bitcoin. And in some cases they are sold Nvidia to buy up this red-hot cryptocurrency for their wallets.
Naturally, a number of factors play a role here. You don’t just sell a very well-performing share Nvidia for no good reason. Let’s take a closer look at why billionaires are switching to Bitcoin.
Bitcoin ETFs
The real tipping point for Bitcoin ownership appears to have been the launch of the new spot Bitcoin ETFs in January. Suddenly, billionaire investors had an easy, convenient way to invest in Bitcoin that didn’t require them to enter the cryptocurrency market directly. Based on the latest 13F filings with the SEC, it is possible to see how much money has flowed into Bitcoin over the past eight months, and honestly, the numbers are staggering.
Nearly $20 billion has flowed into Bitcoin since the start of the year, according to the latest figures from CoinShares. That far exceeds the figure for any other cryptocurrency, and you can thank the new Bitcoin ETFs for that. In fact, hedge funds have emerged as some of the biggest buyers of these ETFs.
As billionaires buy up Bitcoin, they simultaneously lose some of their Nvidia holdings. Earlier this summer, for example, two high-profile billionaire hedge fund managers – David Shaw of DE Shaw and Steven Cohen of Point72 Asset Management – sold Nvidia stock and reallocated that money to the iShares Bitcoin Trust (NASDAQ: IBIT)which has become the most popular of the new spot Bitcoin ETFs.
Bitcoin’s upside potential
It is certainly understandable why so much money has flowed into Bitcoin this year. Digital assets are up 40% year to date, hitting a new all-time high of $73,750 in March.
That’s impressive, but Nvidia is up an even more impressive 132% this year. And if you zoom out and look at Nvidia’s performance over the past two years, it’s staggering. If there was ever a stock that has truly gone parabolic, it’s Nvidia.
Billionaires are supposed to be the “smart money,” so why would they sell an asset that has gone parabolic and spend that money elsewhere? It may sound obvious, but it has to do with Bitcoin’s upside potential.
It is likely that Bitcoin will have an even greater advantage than Nvidia over the next twenty years. In fact, Michael Saylor from MicroStrategy has suggested that Bitcoin could eventually be worth as much as $49 million per coin by 2045 a potential return on investment of almost 83,000%!
Bitcoin as a standalone asset class
Another factor in Bitcoin’s favor is the growing realization on Wall Street that cryptocurrency is an asset class in its own right, with its own unique risk-reward profile. That has enormous significance from a portfolio diversification perspective. So just as a savvy billionaire investor might allocate a certain percentage of a portfolio to traditional asset classes (like stocks or bonds), there is now a need to allocate at least a small portion of that portfolio to crypto as well.
The big question, of course, is how big that allocation will be. For now, it appears that most billionaire hedge fund investors are choosing to allocate somewhere between 0.2% and 1% of their portfolios to Bitcoin. So it is not the case that they are already diving head first into crypto.
But 1% of a $100 million portfolio is $1 million, so there’s serious money at stake. And that 1% allocation is certainly destined to grow much larger over time. For example, Cathie Wood of Ark Invest suggests that the optimal portfolio allocation to Bitcoin could be as high as 19.4%.
Bitcoin’s risk-adjusted performance
Both Bitcoin and Nvidia are risky and upside investment opportunities. Rather than focusing solely on absolute returns, a better approach might be to focus on risk-adjusted returns.
The most popular way to measure risk-adjusted returns is through the Sharpe Ratio, which takes into account the volatility of the assets being tracked. In general, the higher the Sharpe ratio, the more attractive the investment.
And that is what makes Bitcoin so remarkable as an investment. Over the past decade, Bitcoin has actually had a higher Sharpe ratio than any other asset class, and that includes technology stocks. In layman’s terms, Bitcoin is incredibly risky and volatile, but man, do you get paid for taking on all that excess risk!
Bitcoin for the long term
Billionaire investors consider more than just past performance. They think about the upside potential, the overall diversification of their portfolio, and the overall amount of risk in their portfolio. And that makes Bitcoin so attractive as a long-term investment opportunity. It may be high risk and speculative in nature, but it has the potential to deliver unparalleled performance in the long term.
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Dominic Basulto has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin and Nvidia. The Motley Fool has one disclosure policy.
Billionaires are selling Nvidia stock and buying up this red-hot cryptocurrency was originally published by The Motley Fool