This weekend I read a report from BlackRock titled “Bitcoin: A Unique Diversifier” by Robert Mitchnick, Head of BlackRock’s Digital Assets Business. This is quite an exciting development, as respected asset managers are beginning to embrace and educate their constituents on the benefits of including Bitcoin in a well diversified portfolio.
There have been a few institutional investment consultants who were trailblazers in recommending, or at least not opposing an allocation to Bitcoin, most notably Joe Marenda of Cambridge Associates and Don Stracke of New England Pension Consultants (NEPC).
There were also a couple of innovative pension funds, that benefited from early allocations to Bitcoin, most notably led by Katherine Molnar, Chief Investment Officer of the Fairfax County Police Officers Retirement System and Ajit Singh, Chief Investment Officer of the Houston Firefighters’ Relief and Retirement Fund. Both were early adopters.
On July 9, 2019 I invited Mark Yusko of Morgan Creek to present to the Santa Clara VTA - ATU Local 265 Pension Plan on the potential benefits of adding a small exposure of Bitcoin to the portfolios. The correlation to other asset classes was low and the sharp ratio was high. My thought was that a small exposure to Bitcoin, 0.50% - 3.0% of the portfolio, would materially improve risk adjusted returns and over the long-term might actually eliminate the Pension’s unfunded liabilities. At that time Bitcoin was trading at +/- $10,000 per coin; today it is trading at $60,000 per coin.
But back to BlackRock’s report that Bitcoin has emerged as a distinctive asset with unique characteristics that set it apart from traditional investment assets. According to the report, Bitcoin stands out due to its independence from traditional risk and return drivers, offering a compelling case for portfolio diversification.
Key Highlights from the Report:
1. Bitcoin’s Unique Nature:
• Unlike traditional assets, bitcoin’s performance is not tightly correlated with global economic factors like stocks and bonds. While it has experienced short-term volatility and occasional correlation with equities, especially during market downturns, its long-term trajectory diverges from traditional financial instruments.
• Bitcoin’s nature as a global, decentralized, and scarce asset makes it attractive as a hedge against macroeconomic and geopolitical uncertainties. It’s seen by some as a “flight to safety” investment during periods of heightened global tensions. See MacroCrunch Issue # 75 for more on Bitcoin as Digital Gold.
2. Low Correlation with Traditional Assets:
• Bitcoin’s long-term correlation with equities and bonds has been minimal, giving it a unique role in a diversified portfolio. In fact, bitcoin’s performance, while volatile, has consistently outpaced other asset classes. For instance, bitcoin outperformed major assets in 7 out of the past 10 years, despite significant drawdowns during certain periods.
3. Bitcoin as a Hedge Against Macroeconomic Risks:
• The report highlights that bitcoin is largely unaffected by certain risks that impact traditional assets, such as banking crises, sovereign debt defaults, and geopolitical instability. Its decentralized and permissionless nature adds to its value as a hedge against these potential disruptions.
• In times of economic or political unrest, such as the COVID-19 pandemic or the Russia-Ukraine conflict, bitcoin has demonstrated resilience, often bouncing back rapidly from initial price declines, see BlackRock’s table below.
4. The Risks of Bitcoin:
• Despite its potential benefits, bitcoin remains a risky investment due to its high volatility and the evolving nature of the cryptocurrency ecosystem. Challenges such as regulatory uncertainty, technological risks, and the unpredictable path of adoption mean that investors must approach bitcoin with caution and size positions accordingly.
5. Portfolio Diversification:
• When added to a traditional 60/40 portfolio, bitcoin at low allocations has shown the potential to improve risk-adjusted returns. However, higher allocations can significantly increase overall portfolio risk due to its inherent volatility. See the chart below from MacroCrunch Issue # 51 effects of adding Bitcoin to a portfolio.
In short, Bitcoin offers a distinct investment opportunity, primarily as a diversifier for portfolios. Its low correlation with traditional assets, combined with its potential as a hedge against macroeconomic risks, makes it an asset worth considering for long-term investors looking for uncorrelated returns. However, its risks should not be overlooked, and a cautious, measured approach is recommended when incorporating bitcoin into an investment strategy.
With the advent of Bitcoin ETFs it is easier than ever to add Bitcoin to a well diversified portfolio. For those with a bit more technical savvy, I would highly recommend storing your crypto on a cold wallet such as Blockstream’s Jade.
PODCAST | VIDEOS:
How To Buy and Store Bitcoin: This is a great video by Matthew Kratter of Bitcoin University where he reviews how to purchase Bitcoin and store it on your Jade wallet. Bitcoin University has many other free educational videos on Bitcoin if you would like to learn more about the ecosystem.
The Greatest Bitcoin Explanation of ALL TIME (in Under 10 Minutes): If you don’t know anything about Bitcoin, watch this video by Peter Van Valkenburgh, the Director of Research at Coin Center as he testifies before the US Senate. Coin Center has a lot solid educational material on Bitcoin
CONFERENCES | TRAVEL:
Money 20/20 in Las Vegas: October 27 - 30 - This conference is focused on what’s next across the world of Payments, FinTech and Financial Services. Please reach out if you would like to connect to discuss angel investing or private credit. Tickets are available here.
FinTech Specialty Finance Forum in Dana Point: December 4-6 - This is a great conference to catch up with peers and get a broad update on the lending markets for consumer, small business and specialty credit markets. Tickets are available here.
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