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In a recent CNBC interview, hedge fund billionaire Paul Tudor Jones discussed why he's buying Bitcoin(CRYPTO: BTC). Interestingly, he did not once mention blockchains, smart contracts, decentralized applications, or non-fungible tokens (NFTs). There was no crypto mumbo-jumbo, and no outlandish price predictions.

Instead, this billionaire hedge fund investor analyzes Bitcoin the same way he analyzes every other asset in his portfolio. Correlations, risk premiums, economic scenarios, and statistical probabilities matter. If you're thinking of investing in Bitcoin now, this investment framework might be helpful.

The starting point is viewing crypto as a unique asset class. Once you do that, you can compare Bitcoin against other asset classes, to see which ones you should be holding in your portfolio, and how much should be allocated to each. Every asset comes with its own unique risk-reward profile, and that's where Bitcoin really stands out. Yes, there is significant risk involved with investing in Bitcoin, but there's also significant upside potential.

Paul Tudor Jones refers to Bitcoin as "a great tail event," and that has a very specific meaning in the investment world. It refers to the possible distribution of events. In statistical terms, a tail event is a 3 standard deviation event, meaning that there is only a 0.3% likelihood of it occurring. If you think about a standard bell curve distribution, for example, there will always be a giant hump in the middle, and very flat tails on either side. Most assets are part of that giant hump in the middle.

But Bitcoin is different -- it's seemingly always the "tail." Sometimes, it's the tail of negative distributions (as was the case in 2022). But more often, it's the tail of positive distributions. As a result, from 2011-2021, Bitcoin was the top-performing asset in the world, and it wasn't even close.While those historical returns are no guarantee of future performance, they do showcase Bitcoin's upside potential.

Bitcoin is also interesting in terms of its correlations. Over the past few months, Bitcoin has started to become more and more correlated with gold. The elevated level of economic uncertainty right now is causing people to search out so-called safe haven assets, and many people consider Bitcoin to be in that class.

This is not because Bitcoin is inherently safe -- it's because Bitcoin is outside the traditional banking system. Thus, if more banks run into trouble, then Bitcoin theoretically won't feel the bite as much as other financial assets.

Image source: Getty Images.

Right now, Paul Tudor Jones still views Bitcoin as a potential inflation hedge, similar to gold. That makes Bitcoin valuable, since it is a potential way to hedge away inflation risk. Thus, over time, the expectation is that Bitcoin will maintain its correlation with gold. However, he warns, once the Fed stops hiking interest rates, the case for Bitcoin as an inflation hedge might start to wane.

Paul Tudor Jones also uses economic modeling to predict the future path of asset prices. This, after all, was what allowed him to predict the 1987 stock market crash and generate tremendous profits in the process. He modeled the stock market crash of 1929, compared it to what was happening in the 1980s, and concluded that stock prices were going to plummet. He's now doing the same with the current situation, comparing it to what occurred during the 2008 financial crisis, to see what might happen next.

You don't need to have a degree in economics to do this same type of modeling. All you need to do is think in terms of potential economic scenarios. In short, think about a few economic scenarios that might happen, and then think how Bitcoin will respond in each scenario. What happens in a rising rate environment? What happens if the economy goes into recession next quarter?

Taking all of this into account, Paul Tudor Jones obviously likes what he sees in Bitcoin. "I've never sat on a horse that long," he says. He started investing in Bitcoin in 2020 when it was trading for around $9,000, rode it up to its all-time high of $68,790, and then watched it plummet all the way to $15,000 before rising once again to near $30,000. He's still holding on to it, nearly three years later.

Of course, you don't want to overdo things when it comes to Bitcoin. We don't know exactly how much Paul Tudor Jones has allocated to Bitcoin right now. Back in 2021, he suggested he might be willing to hold as much as 5% in Bitcoin. However, more recently, he suggested that he was allocating just 1% to 2% of his portfolio to Bitcoin.

Even if you don't agree with Paul Tudor Jones, one thing is clear: You can become a better crypto investor by changing the way you analyze Bitcoin. Instead of relying on popular crypto narratives (many of which sound like marketing slogans for Bitcoin), use the same tried-and-true approaches used by billionaire investors.

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Billionaire Investor Paul Tudor Jones Is Buying Bitcoin Now. Should ... - The Motley Fool