Nvidia is hot. But some billionaire investors think Bitcoin could be even hotter.
Until recently, billionaire investors appeared to have little or no interest in buying Bitcoin (BTC 1.39%). But that seems to be changing in 2024. Half of the top 20 billionaire hedge fund managers now own Bitcoin. And, in some cases, they are selling off Nvidia in order to buy up this red-hot cryptocurrency for their portfolios.
There are a number of factors at work here, of course. You don’t just sell off an ultra-high-performing stock like Nvidia for no good reason. Let’s take a closer look at why billionaires are shifting into 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’s possible to see how much money has flowed into Bitcoin over the past eight months, and quite frankly, the numbers are staggering.
According to the latest figures from CoinShares, nearly $20 billion has flowed into Bitcoin since the start of the year. 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.
At the same time as billionaires are buying up Bitcoin, they are simultaneously shedding some of their Nvidia holdings. For example, earlier this summer, two high-profile billionaire hedge fund managers — David Shaw of D.E. Shaw and Steven Cohen of Point72 Asset Management — sold off Nvidia stock and reallocated that money to the iShares Bitcoin Trust (IBIT -4.52%), which has become the most popular of the new spot Bitcoin ETFs.
Bitcoin’s upside potential
Certainly, it’s understandable why so much money has flowed into Bitcoin this year. The digital asset is up 40% year to date and set a new all-time high of $73,750 back 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 jaw-dropping. If there’s ever a stock that has gone truly parabolic, it’s Nvidia.
Billionaires are supposed to be the “smart money,” so why would they sell off an asset that’s gone parabolic and reallocate that money elsewhere? It may sound obvious, but it has to do with Bitcoin’s upside potential.
Arguably, Bitcoin has an even higher upside than Nvidia over the next two decades. In fact, Michael Saylor of MicroStrategy has suggested that Bitcoin could eventually be worth as much as $49 million per coin by 2045. That represents a potential return on investment of nearly 83,000%!
Bitcoin as a stand-alone asset class
Another factor in Bitcoin’s favor is the growing realization on Wall Street that cryptocurrency is a stand-alone asset class, with its own unique risk-reward profile. That carries enormous significance from the perspective of portfolio diversification. So, just as a savvy billionaire investor might allocate a certain percentage of a portfolio to traditional asset classes (such as stocks or bonds), there’s now a perceived need to allocate at least a tiny portion of that portfolio to crypto as well.
Image source: Getty Images.
The big question, of course, is just how big that allocation is going to be. For now, it appears that most billionaire hedge fund investors are choosing to allocate anywhere from 0.2% to 1% of their portfolios to Bitcoin. So it’s not like they’re jumping head-first into crypto quite yet.
But 1% of a $100 million portfolio is $1 million, so serious money is at stake. And that 1% allocation is surely destined over time to become much bigger. For example, Cathie Wood of Ark Invest suggests that the optimal portfolio allocation to Bitcoin might be as high as 19.4%.
Bitcoin’s risk-adjusted performance
Both Bitcoin and Nvidia are high-risk, high-upside investment opportunities. Instead of focusing solely on absolute returns, then, a better approach might be to focus on risk-adjusted returns.
The most popular way to measure risk-adjusted returns is via the Sharpe Ratio, which takes into account the volatility of the asset being tracked. Generally speaking, the higher the Sharpe Ratio, the more attractive the investment.
And that’s what makes Bitcoin so remarkable as an investment. Over the past decade, Bitcoin actually has a higher Sharpe Ratio than any other asset class, and that includes tech 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 haul
Billionaire investors take more into account than just past performance. They are thinking about upside potential, the overall diversification of their portfolio, and the overall amount of risk in their portfolio. And that’s what makes Bitcoin so enticing as a long-term investment opportunity. It may be high risk and speculative, but it has the potential to deliver unmatched performance over the long haul.