In a way, this is an odd position. One could argue that bitcoin and cryptocurrencies are way ahead of other blockchain applications, in that they are accepted by millions of investors. Almost no blockchain technologies are widely used…yet.

Can one short bitcoin?

One of the theories behind bitcoin’s price rise is that it cannot be shorted. However, we believe this to be incorrect. Investors can short bitcoin on the digital asset exchange, BitMEX. Approximately, $1 to $2 billion of notional bitcoin trades daily on BitMEX.

Is bitcoin a bubble that can go to zero?

No doubt that bitcoin is in a speculative updraft that will end one day.  But the huge percentage price increases themselves prove nothing—remember the initial price of Alibaba, Amazon or Google stock?  These companies were started in garages. Apple stock was probably valued at $0.01 per share when it started and rose thousands of percent before its IPO.

Interestingly, if bitcoin were to go to zero, we believe it is unlikely to create systemic financial risk. This is due to the fact that we believe bitcoin exposure of financial institutions is limited to market-making and trading firms. There is greater system risk in the European debt markets, where junk bonds have lower interest rates than U.S. government debt despite debt levels being very high. A disruption in those markets would directly affect the financial system and stock and bond markets.

Should one buy bitcoin?

The decision to buy bitcoin is based on one’s own investment goals, time horizon and risk tolerance. Below are a few ideas to discuss with one’s financial advisor:

• Technology investments are often appropriate for aggressive investors with a long-term time horizon. Digital assets represent a new kind of technology, but they are mainly unproven. Unfortunately, publicly listed stocks are not a great way to own digital assets. The most direct play today is semiconductor stocks which are benefiting from blockchain-related demand. 

• Aggressive investors may think about allocating a small percentage of their portfolios to digital assets. For example, hedge fund manager Mike Novogratz has mentioned a 1 percent to 3 percent allocation may be appropriate.