Until recently, billionaire investors seemed to have little interest in buying Bitcoin. (Cryptocurrency: BTC)But that’s set to change in 2024. Half of the top 20 billionaire hedge fund managers now own Bitcoin, and in some cases are selling their NVIDIA shares to buy the popular cryptocurrency for their portfolios.
Of course, there are many factors at play here. No one would sell a super-performing stock like Nvidia for no reason. Let’s take a closer look at why billionaires are moving to Bitcoin.
Bitcoin ETFs
The real turning point for bitcoin ownership appears to have been the launch of a new spot Bitcoin ETF in January. Suddenly, billionaire investors had an easy and convenient way to invest in bitcoin without having to enter the cryptocurrency market directly. Based on the latest 13F filing with the SEC, we know how much money has flowed into bitcoin over the past eight months, and 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, far more than any other cryptocurrency, and this is all thanks to new Bitcoin ETFs. In fact, hedge funds have emerged as the largest buyers of these ETFs.
At the same time that billionaires are buying up Bitcoin, they are also selling off some of their Nvidia holdings. For example, earlier this summer, two well-known billionaire hedge fund managers, David Shaw of DE Shaw and Steven Cohen of Point72 Asset Management, sold their Nvidia shares and reallocated the funds into the iShares Bitcoin Trust. (Nasdaq: IBIT)is becoming the most popular of the new spot Bitcoin ETFs.
Bitcoin upside potential
Certainly, it’s understandable why so much money has flowed into Bitcoin this year: The digital asset has risen 40% so far this year, hitting an all-time high of $73,750 in March.
That’s great, but Nvidia is up an even more impressive 132% this year. And when you broaden your perspective and look at Nvidia’s performance over the past two years, it’s astounding. If there’s any stock that’s really skyrocketed, it’s Nvidia.
Billionaires are supposed to be “smart money,” so why would they sell off a skyrocketing asset and reallocate the money elsewhere? It may sound obvious, but it has to do with Bitcoin’s upside potential.
Bitcoin probably has even more upside potential than Nvidia over the next 20 years. In fact, MicroStrategy’s Michael Saylor suggests that Bitcoin’s value could reach $49 million per coin by 2045. That would represent a return on investment of roughly 83,000%.
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Bitcoin as an independent asset class
Another factor in Bitcoin’s favor is the growing realization on Wall Street that cryptocurrencies are a standalone asset class with their own risk and return profile. This has huge implications in terms of portfolio diversification. Therefore, just as a smart billionaire investor would allocate a percentage of their portfolio to traditional asset classes (such as stocks and bonds), they are now realizing that they should allocate at least a small portion of their portfolio to cryptocurrencies.
Of course, the big question is how big that allocation will be. For now, it appears that the majority of billionaire hedge fund investors are choosing to allocate 0.2% to 1% of their portfolios to Bitcoin, meaning they’re not jumping headfirst into cryptocurrencies just yet.
But 1% of a $100 million portfolio is $1 million, so there’s a lot of money at stake. And that 1% allocation is certainly destined to get even bigger over time. For example, Cathie Wood of Ark Invest suggests that the optimal portfolio allocation to Bitcoin could be 19.4%.
Bitcoin’s risk-adjusted performance
Both Bitcoin and Nvidia are high-risk, high-return investment opportunities, so instead of focusing solely on absolute returns, focusing on risk-adjusted returns may be a better approach.
The most common way to measure risk-adjusted returns is using the Sharpe Ratio, which takes into account the volatility of the asset being tracked. Generally, the higher the Sharpe Ratio, the more attractive the investment.
And that’s why Bitcoin is noteworthy as an investment: Over the past decade, Bitcoin has had a higher Sharpe ratio than any other asset class, including technology stocks. In layman’s terms, Bitcoin is incredibly risky and volatile, but in return for taking on that excess risk, you can earn some pretty impressive rewards.
Bitcoin in the long term
Millionaire investors consider more than just past performance. They think about upside potential, diversification across their portfolios, and the amount of risk across their portfolios. And that is why Bitcoin is so attractive as a long-term investment opportunity. It may be risky and speculative, but it has the potential to perform unparalleled over the long term.
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Dominic Basulto invests in Bitcoin. The Motley Fool invests in and recommends Bitcoin and Nvidia. The Motley Fool has a disclosure policy.
The article Billionaires are selling Nvidia shares and buying up the popular cryptocurrency was originally published by The Motley Fool.
