Contrary to many misconceptions, Bitcoin can function as an asset class in investor portfolios, alongside traditional assets like equities or gold. Viewing Bitcoin through the same lens as one were to use for any traditional asset, we see five compelling reasons why investors may consider including Bitcoin in their investment portfolios.
1. Bitcoin is a store of value, like gold
Bitcoin offers similar store of value characteristics to gold. Bitcoin’s supply is guaranteed, predictable, and independent of global markets and macroeconomic conditions. Its software caps supply at 21 million Bitcoin, allowing us to model its supply and inflation a century forward1.
2. Bitcoin offers diversification via low correlation to other asset classes
Historically, Bitcoin has exhibited low correlation to traditional assets both in periods when markets are volatile and when they are not2. During the recent COVID-19 sell-off, for example, Bitcoin exhibited strong defensive qualities in a period when most assets declined between 10% to 30%.
3. Bitcoin has delivered high risk adjusted returns historically
Bitcoin has historically had strong long-term returns in comparison to other asset classes, like equities and fixed income2. Like many nascent asset classes, Bitcoin is volatile. Bitcoin’s volatility, however, is similar to volatility of popular stocks such as AMD, Netflix, or Twitter, and its worst drawdowns have been matched by various blue-chip funds and blue-chip stocks. At small allocations, Bitcoin can act as a strong diversification tool for portfolio construction.
4. Bitcoin has emerged as a liquid asset class with institutional-grade capacity
The liquidity of Bitcoin as an asset class has grown continuously, with spot average daily trading volumes (“ADTV”) of $1.5-$3.0 billion3. Investors can supplement capacity with Commodity Futures Trading Commission- approved Bitcoin derivatives: the Chicago Mercantile Exchange Bitcoin futures market has grown to $350-$400 million in ADTV3. Lastly, there exists a multi-billion dollar per day market for Over The Counter (“OTC”) futures.
Bitcoin’s liquidity is in the top decile of S&P 500 constituents over the last few years and would place in the top-30 most liquid assets in the U.S. as of 20203. This liquidity would potentially allow institutional investors to put on large Bitcoin positions with relative ease.
It is pertinent to note that Bitcoin payments are irreversible. Transactions cannot be reversed, although some establishments may be willing to offer a refund.
5. Top-tier traditional asset service providers have arrived to support rising Bitcoin adoption
The roster of digital asset service providers features many institutions familiar to traditional investors, like the Intercontinental Exchange, Ernst & Young and PricewaterhouseCoopers. In recent years, Bitcoin markets have seen an influx of offerings from digital asset service providers, such as digital asset custody services, fund administration, audit, and legal council.
Bitcoin can play a role in investment portfolios
We believe an allocation to Bitcoin has the potential to provide investors with attractive risk-adjusted returns. Bitcoin has historically delivered strong performance relative to traditional asset classes, like equities and fixed income, while also delivering attractive diversification properties2. As an asset class, Bitcoin is continuing to mature for investor adoption, with trading volumes consistently increasing and institutional service providers offering support to deliver operational efficiencies.