Capital Ideas^™

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Fear of missing out is a powerful force in investing. It is particularly difficult to ignore an asset that has gained more than 900% in the past five years.

Bitcoin and other cryptocurrencies have captured the imagination of investors, rising to become a more accepted and influential asset class. To be sure, there still are critics who argue that the “crypto craze” is a passing fad. But these days, there are fewer people in that camp — especially when it comes to the original, largest and most influential crypto: Bitcoin.

“For a long time, people have been somewhat skeptical of Bitcoin,” says Carl Kawaja, portfolio manager for Capital Group Global Equity Fund^TM (Canada). “There are naysayers who raise a lot of questions about it. The debate has gone on for years. But as far as I’m concerned, that debate is over.”

A remarkable track record

While it’s important to stress that past results to do not guarantee future returns, the rapid rise of Bitcoin over the past few years has made it one of the most popular, headline-grabbing topics in the global financial markets.

“Bitcoin has been the best performing asset class over the last five-, 10- and 15-year periods,” notes Capital Group portfolio manager Mark Casey, who has studied it for years and keeps a stack of Bitcoin-related books in his office to share with colleagues. “No other crypto project has anywhere near Bitcoin’s potential, in my view.”

That is because Bitcoin’s unique design solves three problems, according to Casey: 

1. Bitcoin’s peer-to-peer architecture means that there are no third-party intermediaries who can censor, cancel or otherwise block Bitcoin transactions.
2. Bitcoin’s military-grade encryption means that properly stored Bitcoin cannot be seized or confiscated.
3. Unlike commodities such as gold and silver, and government-printed fiat currencies, Bitcoin has a fixed, unalterable supply limit, and therefore is not subject to traditional monetary inflation.

“You can see why this type of asset might be attractive to anyone living under authoritarian rule — as 40% of the world’s population does — or anyone who is simply skeptical of government controlled fiat currencies,” Casey says. “Bitcoin is the first property that each person can secure by themselves without the need for law enforcement.”

What is Bitcoin?

Bitcoin is by far the most popular variation among a class of assets designed to create a digital currency through advanced cryptography. Others include Ethereum, Tether and Ripple. Unlike traditional currencies, Bitcoin operates without central authority or banks and is not backed by any government.

Bitcoin traces its roots to 2008, when an anonymous programmer using the pseudonym Satoshi Nakamoto published a white paper outlining the technology necessary to enable the cryptocurrency. Crucially, the paper described the process of “mining,” which creates a supply of new Bitcoins. Bitcoins are mined using computer algorithms that solve a series of calculations. These time-consuming computations verify Bitcoins and allow for the creation of new ones. Only 21 million Bitcoins can be mined, and they become more time-consuming to create as the supply grows.

Today, there are more than 25,000 other cryptocurrencies generally based on this concept. Additionally, there are publicly traded companies that exist primarily in the crypto space, either as buyers and traders or as digital mining firms. These companies include Strategy (formerly MicroStrategy), Galaxy Digital, MARA Holdings and Riot Platforms, among others.

Volatility in action

The cryptocurrency market can be summed up in two words: Extreme volatility. Various cryptocurrencies can move violently based on real news or simply wild rumours. Bitcoin gets the most headlines, primarily because it has the largest market capitalization at roughly US$1.9 trillion.

“Bitcoin tends to garner a lot of attention every time it has a steep run-up in value,” explains Capital Group portfolio manager Alan Wilson. “But keep in mind, at some point it may go in the other direction. Anyone speculating should be prepared for extreme volatility in either direction.”

The most recent Bitcoin price surge came after the U.S. elections in November. For the first time in its relatively short history, the price skyrocketed above US$100,000 per Bitcoin on investor hopes that the incoming Trump administration would take a business-friendly approach to the cryptocurrency industry. The price has since moved downward to roughly US$87,000, as of February 25, 2025.

How to address client questions

With the Bitcoin basics out of the way, what are the key issues to consider when discussing cryptocurrencies with your clients? Several Capital Group professionals who have studied the crypto industry offer four viewpoints:

1. Explain the risks

Bitcoin and other cryptocurrencies come with significant, well-documented risks. As with any investment, it’s important to do extensive research and explain the pros and cons before proceeding.

One of the biggest potential risks involves government-imposed crackdowns on the industry. Some governments may view crypto as a threat to their own currency. For instance, in a series of actions from 2013 to 2021, China stopped banks from processing crypto transactions, outlawed crypto exchanges, and issued a complete ban on crypto trading and mining.

At various times, the U.S. government has explored greater regulation of cryptocurrencies, particularly after the 2022 collapse of crypto exchange FTX. In one of the industry’s biggest scandals, FTX founder Sam Bankman-Fried was convicted of fraud and sentenced to 25 years in prison for essentially stealing customer assets. The FTX scandal sparked calls for tougher guidelines. However, since taking office in January, President Trump has been viewed as “crypto friendly” and unlikely to pursue additional regulations through the SEC or other federal agencies.

“While it’s certainly not impossible to disrupt, the global Bitcoin community has shown resilience and innovation in responding to both regulatory and technological challenges over time,” says Capital Group economist Bobby Esnard, who has followed the crypto industry for years.

Beyond government regulation, other risks include outright theft of crypto assets through hacking or other fraudulent means. Crypto assets can also simply be lost if an investor removes his assets from an exchange and then cannot remember the complex password needed to access them.

2. Clarify that Bitcoin may not hedge against equities

A common assertion among Bitcoin enthusiasts is that it may help provide downside protection when U.S. equity markets decline. While that has been the case at times in the past, it hasn’t been consistent or reliable enough to identify a strong, long-term correlation.

For example, Bitcoin did not act as an effective hedge during the COVID-related bear market in 2020, and it moved very much in line with sharp declines in stocks in 2022.

“It remains an open question whether Bitcoin can act as a hedge,” says Capital Group currency analyst Jens Sondergaard. “Investors should be careful assuming too much about how it might behave in various market environments.”

3. Suggest limits and treat it as a learning experience

Given the risks, you might tell clients who are interested in Bitcoin to consider making it a relatively small percentage of their portfolio, perhaps in the single-digit range, says Capital Group portfolio manager Barbara Burtin, who has closely followed the financial services sector for years.

Owning a small amount could be useful as an educational exercise, Burtin explains. Having “skin in the game” is a way to encourage clients to learn about the growing crypto market. It’s also a way to assess their true risk tolerance and observe their reactions to high levels of volatility. That insight into a client’s psychology could be useful when crafting a larger asset allocation plan.

“If you have a client who really wants to buy Bitcoin, just saying ‘don’t do it’ is a disservice,” Burtin says. “Owning a small amount can be a learning experience — for you and for the client — in addition to the potential gains.”

In the past four years, the launch of several Bitcoin-linked exchange-traded funds (ETFs) has made it easier than ever to gain exposure to the asset class, Burtin notes, while also making Bitcoin a far more accepted concept in the financial services industry.

4. Consider positioning Bitcoin as a long-term investment

Although it may seem prudent for advisors to discourage clients from buying Bitcoin or other cryptocurrencies, there are valid reasons to explore the options. In addition to providing valuable insights into investor psychology, it presents the opportunity to refocus client attention on the importance of long-term investing.

Much has been written about the quick profits made by trading Bitcoin over relatively short periods of time. But those profits are dwarfed by investors who followed a buy-and-hold strategy over many years, Burtin points out.

“I prefer to think about it as a long-term investment, rather than a short-term trading opportunity,” Burtin says. “Bitcoin is going to be volatile. So taking a long-term approach may help your clients ride out that volatility, just as you would with equity investments.

“Behaviour is so important when it comes to investing,” Burtin adds. “It’s more than a crypto experiment. It’s a social experiment.”