Quote from: bozak on May 23, 2013, 05:03:12 PM

Almost every article published to date that covers the topic of bitcoin as an investment takes it as a given that bitcoin is a risky investment. "Only invest what you can afford to lose" is a common sentiment even on the bitcoin forum.

Although I agree that bitcoin should/can be considered a risky investment depending on the context, I submit that a small bitcoin investment is actually a conservative/risk lowering investment for most US investors. This conclusion is reached when you consider the full context and diversification of the average investment portfolio in the US. It looks a little something like this: stocks, bonds, real estate, cash and cash equivalents, and precious metals, typically in that order based on the relative weight of the investment. Note that all of these assets are directly linked to US dollars other than precious metals and real estate. If we make the assumption that diversification lowers risk, it also makes sense that the average US investment portfolio should not be overly weighted towards US dollar denominated assets. Sure the US dollar is the world's reserve currency and therefore has a "low-risk" tag currently associated with it, but that doesn't mean it makes sense to have almost all investment assets directly tied to the US dollar. Proper diversification includes diversificatoin into other asset classes, including non-flationary currencies such as bitcoin. Considering the potential that non-government backed crypto-currencies have to disrupt the monetary system, even if one believes that the probability is small of a wide scale disruption, it still makes sense to have some assets (i.e. bitcoin) that would benefit from such a disruption.

I'll admit that bitcoin fits the classic definition of a riskly investment. However, I would argue that for an investor that currently has a high allocation of stocks and bonds, an investment in bitcoin would actually lower risk for the complete portfolio rather than raise it as it is commonly assumed.

Therefore, I no longer think it is appropriate to broadly classify bitcoin as a "risky investment" to US investors. It is certainly not a non-risky investment, but all such labels should be taken in the context of a given investors full investment portfolio.

Very good point. If indeed it is a small allocation to bitcoin (5%) then it is true that it does not raise the risk, but lowers the risk of the overall portfolio. However, if it is a big allocation (50%), even when that is only due to value increases, then the overall risk is higher than a traditional portfolio, hence why keeping the bitcoin exposure small is crucial if it is safety that you are aiming for.

Your insight is a very strong argument for people with capital to buy some bitcoin. Price is irrelevant to buy that 5% bitcoins as an insurance not taken is more risk. Tomorrow bitcoin price can crash or explode, you never know. If it crashes and you have small allocation, it's a small loss that will be recovered by the other assets, but if it explodes, and you don't have it, it can be a huge loss that is not recovered by the other assets.