This cryptocurrency is a favorite of billionaire investors and here’s why

This is the year that Bitcoin (BTC -3.62%) became a big hit with billionaire hedge fund managers. Based on recent 13F filings with the Securities and Exchange Commission, more than half of the top 25 hedge funds (as measured by assets under management) in the United States now own Bitcoin.

So that leads to the obvious question: Why has Bitcoin suddenly become so attractive to billionaire investors in 2024? Let’s take a closer look.

The ease and convenience of Bitcoin ETFs

The story really begins with the launch of the new spot Bitcoin ETFs in January. Before that, billionaire hedge fund managers could still buy Bitcoin, of course, but the process was much more complex and liquid. It required the creation of digital wallets, the establishment of new risk management controls, and the purchase of cryptocurrency directly on cryptocurrency exchanges.

That all changed in January 2024, when hedge funds run by billionaires began buying Bitcoin in the form of new spot Bitcoin ETFs. The launch of the new spot Bitcoin ETFs has made the process of buying Bitcoin easier and more convenient than ever before. And best of all, these Bitcoin ETFs came with the seal of approval from the SEC. In essence, buying Bitcoin has become as common as buying a tech stock.

Potentially positive

Of course, another important factor in the decision to buy Bitcoin is its long-term growth potential. For more than a decade, Bitcoin has been the world’s best-performing asset, and billionaire hedge fund managers have taken notice. Between 2011 and 2021, Bitcoin delivered annual returns of 230%. By comparison, tech stocks have only returned 20% a year. So Bitcoin is certainly enticing as a potential way to turbocharge portfolio returns.

And it’s not as if Bitcoin lacks any future growth potential. Frankly, the price forecasts that appear regularly for Bitcoin are astounding. At one time, predicting that Bitcoin would reach a price of $1 million was sensational. But that’s old news now. Cathie Wood of Ark Invest believes that Bitcoin will reach $3.8 million per coin by 2030. And Michael Saylor of MicroStrategy Inc. believes that Bitcoin’s future growth potential is $13 million.

Protection against negative risks

Billionaire investors also appreciate Bitcoin’s potential downside protection. This might sound counterintuitive at first, given the perception of crypto as a risky, speculative and volatile investment. But Bitcoin actually shares some of the same characteristics of gold (such as a finite supply and its ability to act as a long-term store of value), which earned it the name “digital gold.”

So, just as you might buy gold to protect against a market correction (or, even worse, a market crash), you can also buy Bitcoin as a hedge against economic, political, and geopolitical risk. Billionaire hedge fund manager Paul Tudor Jones has suggested that to protect against risk, the two best assets you can own right now are gold and Bitcoin. And billionaire investor Stanley Druckenmiller even suggested that Bitcoin could be superior to gold.

The benefits of portfolio diversification

One of the key tenets of modern portfolio theory (which focuses on how to maximize expected returns for a given level of risk) is that you can make your portfolio less risky by adding a risky asset. So, for example, it is not necessarily the case that adding a risky asset like Bitcoin to your portfolio will make it riskier. Since Bitcoin has historically not been correlated with major asset classes, there is an argument to be made that adding Bitcoin could reduce overall risk. In layman’s terms, Bitcoin can tell when the market is in a zag, thus helping to reduce risk.

Image source: Getty Images.

So how much Bitcoin should you add to optimize your portfolio? It depends on who you talk to – and when. For example, Ark Invest’s Cathie Wood crunched the numbers earlier this year and determined that the optimal risk-adjusted portfolio would have a nearly 20% weighting of Bitcoin. This is well above the standard 1% allocation for Bitcoin.

And indeed, it appears that the average Bitcoin allocation of top billionaire investors is only 0.2%. Even the most aggressive hedge funds managed by the billionaire seem to limit their exposure to just 1% of assets under management. Thus, if they manage $100 million in assets (which is the threshold for filing a 13F), then they could only hold $1 million in Bitcoin.

Investment lessons from billionaires

Putting it all together, there are a number of useful lessons for individual investors. For example, you might consider buying a Bitcoin ETF rather than buying Bitcoin directly through a cryptocurrency exchange. And you should consider other factors when buying Bitcoin beyond its future growth potential, such as how risk-tolerant you are to the cryptocurrency’s violent price fluctuations over time.

Yes, I know it’s sexy to talk about million dollar price targets. But you know what else is sexy? Downside risk protection and portfolio diversification benefits. The combination of all three is what has made Bitcoin a favorite among billionaire investors.