Bitcoin in Portfolio: Insights from the BlackRock Report

Introduction

Bitcoin has been part of my investment portfolio for some time. While I’m not an active trader, I check relevant news from time to time, which led me to a recent Bitcoin report released by BlackRock. As the world’s largest asset manager and the leading Bitcoin ETF provider, BlackRock’s insights are worth a read. Below is what I think is particularly worth sharing from the report. Note that I have rephrased or condensed some parts. All rights remain with the original author, BlackRock, and any personal commentary is marked as [Neo] for easy distinction. Let’s dive in.

Why Bitcoin Matters?

Bitcoin revolutionized traditional monetary systems by addressing age-old problems. It introduced a digitally native, global, scarce, decentralized, and permissionless currency, offering solutions to several long-standing challenges.

Source: BlackRock Bitcoin report (Sep 17, 2024)

Bitcoin's Long-Term Performance

Since its inception on July 19, 2010, Bitcoin has delivered an astounding cumulative return of 807,000%, as shown in the chart below.

Source: BlackRock Bitcoin report (Sep 17, 2024)

While Bitcoin's annualized return has exceeded 100% over the past decade, it's accompanied by significant volatility, with four drawdowns of more than 50%. Despite these setbacks, Bitcoin has consistently rebounded to new highs, showcasing its resilience. However, its future as a global store of value or payment asset remains uncertain.

Bitcoin's Correlation with S&P 500

Bitcoin's low correlation with equities and other traditional assets is a key factor contributing to its diversification benefits. While there have been short-term periods of increased correlation, particularly during shifts in U.S. dollar real interest rates, these instances have not resulted in a statistically significant long-term relationship.

Source: BlackRock Bitcoin report (Sep 17, 2024)

The above chart illustrates the trailing 6-month correlation between bitcoin and the S&P 500 from 2015 to 2024. The average correlation over this period is 0.2, indicating a relatively weak relationship.

Bitcoin vs. S&P 500, Gold during Major Geopolitical Events

Bitcoin has demonstrated remarkable resilience in the face of disruptive global events. While it may experience temporary negative reactions, it often recovers quickly, outperforming traditional assets.

Source: BlackRock Bitcoin report (Sep 17, 2024)

(Neo) This is my favorite table in the report. Bitcoin's rapid declines during events like the COVID-19 crisis (March 2020), Russia's invasion of Ukraine (February 2022), and the yen carry trade unwinding (August 2022) made it appear like a risky asset. Yet, in other moments of crisis such as the U.S. drone strike on an Iranian general and subsequent Iranian retaliation (January 2020), the Capitol riot following Trump’s refusal to concede the 2020 election (January 2021), and the U.S. regional bank run (March 2023), Bitcoin posted strong gains. So, was Bitcoin a safe haven? One of BlackRock’s key insights is that Bitcoin defies simple categorization as either a risky or safe asset. It carries unique risks, and its low correlation with traditional assets like the S&P 500 means that even a small allocation can enhance portfolio diversification. Another noteworthy point is that, over the past four years, Bitcoin has outperformed the S&P 500 and gold in all five major geopolitical events within 90 days.

Two primary factors contribute to bitcoin's resilience:

• Immediate Liquidity: Bitcoin's 24/7 trading and near-instantaneous settlement to cash provide liquidity during times of market stress.
• Market Immaturity: While the Bitcoin market is still immature, investor understanding and recognition of bitcoin's potential are growing.

U.S. Debt Dynamics and Bitcoin

The chart below illustrates the significant growth of U.S. gross federal debt since 1940, with projections indicating continued increases that raise concerns about long-term fiscal sustainability. The figures from 2024 to 2029, shown to the right of the dotted line, are projections.

Source: BlackRock Bitcoin report (Sep 17, 2024)

Growing concerns about U.S. federal deficits and debt have sparked interest in alternative reserve assets. Bitcoin's unique characteristics, its decentralized nature and independence from traditional financial systems, make it an appealing option for investors looking to diversify their portfolios and hedge against potential risks related to U.S. debt.

Key Points

• Bitcoin's high volatility makes it a "risky" asset. However, its risk and potential return drivers differ fundamentally from those of traditional "risky" assets, making it unfitting for conventional finance frameworks like risk-on vs. risk-off.
• As a scarce, non-sovereign, decentralized global asset, Bitcoin has been viewed by some investors as a safe haven during times of fear or geopolitical disruption. 
• Over the long term, Bitcoin's adoption will likely depend on concerns about global monetary stability, geopolitical stability, U.S. fiscal sustainability, and political stability - an inverse relationship compared to traditional "risk assets” with respect to such forces.
• While it offers unique benefits, investors must carefully consider its risks and potential impact on their portfolios.

Final Thoughts

(Neo) Although it’s not in the main body of the report, I found this statement in the footnotes: "Historically, the impact of adding bitcoin to a traditional 60/40 portfolio of equities and fixed income, respectively, at low single digit percentages had a material positive impact on the Sharpe Ratio (as well as various other metrics of risk-adjusted return) while at large percentages, it contributed to a significant increase in portfolio volatility." I think this might be the most important message that BlackRock is trying to  convey in this report.

My summary interpretation is "Bitcoin may crash during geopolitical events, but it often recovers quickly, sometimes outperforming traditional assets. The average correlation between Bitcoin and S&P 500 has been weak. So, if you add just a small amount to your portfolio, volatility may increase slightly, but returns could rise  meaningfully. Perhaps you should consider adding BlackRock's IBIT ETF up to 5% of your total investment.”

Then, how much could adding Bitcoin boost overall portfolio returns? I’ll leave you with a very informative table from WisdomTree, an asset management firm specializing in ETFs. It demonstrates how different Bitcoin allocations to a 60/40 portfolio improved returns and the Sharpe ratio - though,  as expected, with increased volatility - over the period from 2014 to 2023.

Source: WisdomTree

Thanks for reading. I wish you success in making smart investments!

P.S. If you would like to read the BlackRock report directly, please refer to this link: the BlackRock Bitcoin report (Sep 17, 2024)

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