Matthew Morris of Carr Consulting & Communications
Bitcoin is back in the headlines and the prices have been going wild again.
For many professional investors, Bitcoin remains a silly fad, a bubble useful only for criminals and clueless speculators.
I believe it is much more than that and this year we are seeing a growing number of financial institutions agreeing.
If you manage a portfolio, you should at least be aware of the reasons some money managers are buying Bitcoin, even if ultimately you decide it is not for you.
Bitcoin hit £30,000 per coin earlier this year and although it has dipped in value since, it has not taken a nosedive in the way it did after the last high in early 2017.
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One of the reasons seems to be the entry of institutional money into the sector. Several firms have publicly entered the space but many more are doing so behind closed doors.
The primary reason appears to be a search for a hard asset in an age of massive expansion of the money supply. You can allocate a percentage of a portfolio to gold and silver but after that there are not many options.
This is why traditional investment firms have begun allocating a small percentage of their portfolio into Bitcoin.
This view is back up by Ben Sebley, chief growth officer at the BCB Group, a global digital financial services firm: “The 2017 run was a retail-led bubble, but this latest run is most definitely led by new institutional entrants.
“We have clearly seen traditional firms make size entries all year; now we have the required regulatory and infrastructure top cover to enable it.
“What industry outsiders do not see is the scale of these entries into the crypto market. Not all traditional firms are making noise publicly about holding digital assets.”
Increased returns, decreased risk
Nickel Digital Asset Management runs several Bitcoin and cryptocurrency funds and has reviewed the effects of a small allocation of Bitcoin on diversified portfolios, using market data over a statistically significant eight-year period.
The analysis reveals that over eight years between 31 December 2012 and 31 December 2020, a standard portfolio of 60% equities (S&P 500) and 40% bonds (US Treasuries) would have delivered a cumulative total return of 124% with a risk (standard deviation) of 10.00%.
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Reallocating just 1% from equities to Bitcoin would have increased the cumulative portfolio return by 22%, to 146%.
Counterintuitively, this allocation would have decreased portfolio risk by 0.05%. This reflects the uncorrelated nature of the digital assets relative to other asset classes, revealing Bitcoin’s important diversification properties.
The analysis further reveals that an allocation of 3% to Bitcoin would have boosted cumulative total return to 196%, an increase of 72%, with a standard deviation experiencing just a minor change of 0.05%.
The maximum drawdown would have declined from 21.6% to 21.3%.
