Analysts have been singing bitcoin’s praises, saying the cryptocurrency could be used as a hedge against fluctuations in traditional assets such as stocks, bonds, and commodities. 

However, JPMorgan strategists urge investors to be cautious in their approach and only make small bets on bitcoin so that they don’t suffer major losses should the price of BTC take a major hit and drop substantially.

1% allocation

JPMorgan’s strategists believe that investors should allocate 1% of the portfolio to bitcoin.

“In a multi-asset portfolio, investors can likely add up to 1% of their allocation to cryptocurrencies in order to achieve any efficiency gain in the overall risk-adjusted returns of the portfolio.”

Last November, bitcoin bull and Galaxy Digital founder Mike Novogratz said “everyone should put 2% to 3% of their net worth in bitcoin and look at it in five years, and it’s going to be a whole lot more.”

Bitcoin was the best-performing institutional asset in 2020, and recently reached a market valuation of more than $1 trillion though it has now dropped to less than $900 billion. JPMorgan, with a valuation of $449 billion, is the largest bank in the world by market cap.

Despite being new and volatile, cryptocurrencies are a good hedge because they are uncorrelated with other assets.

Reducing the volatility of equity portfolios

Roberto Perli and Benson Durham, former Federal Reserve economists now at the macro-research firm Cornerstone Macro ran calculations that found out that digital assets can reduce the volatility of equity portfolios.

JPMorgan added that there is a limit to the usefulness of digital assets.

“Cryptocurrencies are investment vehicles and not funding currencies,” said JPMorgan strategists. 

“So when looking to hedge a macro event with a currency, we recommend a hedge through funding currencies like the yen or U.S. dollar instead.”

In an interview with CNBC, Ark Investment Management Founder and CEO Cathie Wood said that if all corporations were to convert 10% of their cash reserves into Bitcoin, it would add $200K to the digital asset’s price.

Corporations embrace bitcoin

When carmaker Tesla revealed last month that it had bought $1.5 billion worth of bitcoins, the investment represented about 8% of the company’s cash reserves.

Software firm MicroStrategy has bet more than $2 billion on bitcoin. Other traditional companies such as BNY Mellon are starting to dip their feet in bitcoin.

The demand for bitcoin is greater than the supply, said Annabelle Huang, a partner at Amber Group.

“Through the insatiable buy-side pressure from exchange-traded fund issuers, close-ended funds and large public corporations adding Bitcoin to their positions, demand is massively outstripping supply.”