Why Bitcoin? A Perspective From Model Portfolio builders
Bitcoin’s growing role in the financial landscape is driven by its potential as a store of value, portfolio diversifier, and hedge against inflation. BlackRock explores why institutional investors are increasingly considering Bitcoin as part of their asset allocation strategies.
Key takeaways
As multi-asset portfolio constructors, we believe bitcoin has long-term investment merit for certain investors and can potentially provide unique and additive sources of diversification to portfolios
In an era of increased geopolitical instability, ballooning sovereign deficits and excessive government spending, we expect the ‘store of value’ narrative will continue to resonate with more investors, and potentially supercharged by boomer-to-millennial demographic tailwinds
A more bitcoin-friendly administration could ease regulatory bottlenecks, potentially unlocking a wave of pent-up innovation and infrastructural development
For investors considering bitcoin in portfolios, a first order question is ‘does bitcoin have any value at all?’ and then the thinking can turn to questions such as sizing and implementation. This piece will focus on the first question, previewing why portfolio constructors might reasonably be interested in bitcoin as part of their investment universe, and what we consider its core value propositions and potential rewardable sources of risk. Our colleagues from the BlackRock Investment Institute have shared their views on the latter question in a recent piece, What role can bitcoin play in a portfolio?
Why now?
The launching of the bitcoin ETPs in 2024 marked a seminal event in financial markets history.
The ability to seek directional exposure to “physical” bitcoin inside the ETP wrapper eases a variety of cryptoasset operational frictions and unlocks a broader eligible pool of potential investors. The dramatic inflows into bitcoin ETPs seem to validate the idea that the next wave of interest in bitcoin (and potentially broader cryptoassets) has begun.
IBIT’s dramatic inflows illustrate previously untapped demand for bitcoin
Growth of iShares Bitcoin Trust ETF AUM since inception
What happens next and what does it mean for us as investors?
Wider investor base, historically lower volatility
Many investment professionals have cited the high volatility in the price of bitcoin over the years as an indictment of its status as an asset class that merits consideration for investment.
But a general maxim of financial markets is increased levels of investor participation can lead to improvements in price discovery and liquidity – and as a consequence – create more price stability. We have seen similar developments in the past when previously isolated assets became unlocked and available to a broader, more institutionalized investor base (1).
Should we reasonably expect bitcoin to follow a similar pattern of price behavior?
Well, let’s unpack some of the instigating reasons why the price of bitcoin has been so volatile in the first place.
Context for bitcoin’s wild swings
While its name-recognition may be at all-time highs, bitcoin as a concept still remains woefully misunderstood. Nevertheless, the value of this complex technology stack is subject to being evaluated and marked-to-market 24 hours a day/7days a week across a global (yet still narrow (2)) investor base with varying levels of sophistication, whose directional crypto bets can be somewhat effortlessly amplified by unregulated and experimental forms of leverage and novelly constructed derivatives.
When viewed through this lens, bitcoin’s sometimes intense volatility makes a lot more sense.
With the launch of bitcoin ETPs, a new wave of professional investors and traditional banking institutions now have the opportunity to participate more meaningfully in bitcoin markets. As noted, larger and deeper pools of broker and market-making capital has historically served as a fundamental driver of systematically moderating asset price volatility over the medium to long term, and we don’t expect bitcoin will be an exception to this rule (3). While bitcoin volatility has trended lower, it still remains high relative to other asset classes and is more on par with individual tech stocks. Further, the potential drawdowns highlights the need to carefully size positions, consider diversification benefits, and take a longer-term view.
Bitcoin volatility remains high, but the trend has clearly been lower
Bitcoin price vs. 1-year trailing volatility
What does this mean for investors?
If bitcoin and cryptoasset markets get incrementally more stable over time, that on a standalone basis doesn’t all-of-a-sudden make bitcoin an attractive investment, right?
Then what does?
From an investment perspective, our Model Portfolio Solutions team appreciates several substantive arguments that support bitcoin’s long-term investment merit. Namely, to potentially serve as a novel store of value and global monetary alternative (4), hedge to US dollar hegemony and political instability, and proxy play on the broader “offline” to “online” digital transition of goods and services – supercharged by “boomer-to-millennial” demographic tailwinds (5). Collectively, these features may help provide unique and additive sources of risk premia and diversification to traditional multi-asset portfolios.
Tell me more…
Since its advent in 2009, the Bitcoin (6) network has processed more than a billion transactions (7) and survived numerous extinction-worthy industry cataclysms (various media outlets and other financial industry commentators have declared bitcoin “dead” several hundred times over the years (8)).
Despite this impressive resilience, bitcoin has often been met with confusion, skepticism. The bitcoin learning curve is steep, and the process of appreciation can take time.
In fact, something as simple as defining bitcoin can still be a messy exercise even today (9). It doesn’t fit neatly into any single conventional paradigm.
At a minimum, we can say bitcoin is a digitally native, bearer asset (10), equipped with cleverly embedded mechanics to communicate value across the internet in a way that is bankless, borderless, permissionless, cost-efficient, fast, and indiscriminate.
One might see how that is a compelling value proposition.
But there’s more. Bitcoin has a defined monetary policy engineered into its DNA (perhaps more relevant now in an era of growing sovereign deficits and profligate government spending) and is also uniquely inelastic to demand. Unlike gold, to which bitcoin is often compared, there’s no ability to meet excess demand with increased supply.
As many know, there is a predictable issuance schedule of new bitcoin until 2140 with a pre-programmed max supply of 21 million tokens (11). However, less widely known is that the real available float is likely far smaller, with a conservative estimate of 3 to 4 million issued bitcoins visible on the blockchain but considered permanently inaccessible (and therefore out of circulation) due to lost, forgotten, or otherwise destroyed keys (12).
To illustrate how few available bitcoins there are, if every millionaire in the US asked their financial advisor to get them 1 bitcoin, there wouldn’t be enough (13).
Bitcoin’s decentralized network also makes it resilient to unauthorized third-party overreach, including corporate and government censorship. Such powerful features can of course be exploited for good and for ill – but as with all revolutionary technology, many are slowly (if even reluctantly) beginning to consider the possibility that the upside could outweigh the downside.
Conclusion
Critics’ go-to refrain is bitcoin has no intrinsic value. To the contrary, in our view, the discussed embedded characteristics represent fundamentally real and attractive sources of intrinsic value, which we expect will be recognized by more people in more places over time – particularly in a debt-laden, digital-first, and increasingly AI-entrenched world.
The iShares Bitcoin Trust ETF is not an investment company registered under the Investment Company Act of 1940, and therefore is not subject to the same regulatory requirements as mutual funds or ETFs registered under the Investment Company Act of 1940.
1 For example, gold’s volatility was similarly high during the early 1970s when the US gold standard was abandoned. As a consequence, the price of gold was no longer systematically fixed to the US dollar and was instead allowed to trade freely as dictated by free market forces. The broader financialization of the gold market is believed to have contributed to the decline in the early volatility of the price of gold. “Unpacking the Great Gold Performance of the 1970s”, Newton Investment Management.
2 “Narrow” in the sense that institutional investors, RIAs, financial advisors, and traditional banking and financial systems have, to-date, been mostly walled off or otherwise disincentivized from meaningfully participating in the cryptoasset ecosystem.
3 See footnote 1 for additional context.
4 We should emphasize that “store of value” is not “low volatility capital preservation”, both of which are often erroneously conflated with one another.
5 Millennials and Gen Z are estimated to inherit approximately $36T from Baby Boomers by 2045. Cerulli, U.S. High-Net-Worth and Ultra-High-Net-Worth Markets, 2021.
6Bitcoin, with an uppercase ‘B,’ generally refers to the decentralized network protocol, while bitcoin with a lowercase ‘b,’ typically denotes the cryptocurrency or individual units of value used within the network and traded on exchanges. This distinction reflects common usages practices, but variations in literature may exist depending on context or source.
7 www.blockchain.com/explorer/charts/n-transactions-total.
8 Bitcoin Obituaries tracked by 99bitcoins.com.
9 “Bitcoin: a unique diversifier”, Robbie Mitchnick, Russell Brownback, Samara Cohen, BlackRock, 2024.
10 Bitcoin is often described as a bearer asset in the sense that, like physical cash, control (rightful or not) is intrinsically determined by possession (independent of any legal claim). Possession of a bitcoin private key on a thumb drive is akin to possession of a physical bill in your wallet. Similarly, destruction of the asset (for all practical purposes) is irreversible. It’s worth acknowledging that, from this perspective, IBIT as an ETP is distinct from native bitcoin. As is well documented, investors in IBIT do not have access to or possession of bitcoin private keys.
11 Source: “Bitcoin: a peer-to-peer electronic cash system”, Satoshi Nakamoto, 2008. Forward looking estimates may not come to pass. There is no guarantee that the current 21 million supply cap for outstanding bitcoin, which is estimated to be reached by approximately the year 2140, will not be changed. Some may find this legal disclaimer confusing or contradictory, but the Bitcoin protocol’s governing set of rules aren’t immutable (and many of them have indeed evolved over the years, particularly with respect to enhancing privacy and transaction throughput).
Bitcoin is simply open-source software that enforces a shared system of rules. But it’s worth noting that even the smallest changes to the core Bitcoin protocol are well telegraphed and have historically been fiercely debated among the community. Any changes would require network consensus and/or a fork of the blockchain (into what would arguably be an entirely separate version of bitcoin). In fact, there are several historical precedents of this happening, with belligerent factions of the community spinning off alternative versions of bitcoin with modified rules. To date none of these competing projects have ever amassed sustained adoption, and it's unlikely in our view that a hypothetical one with increased supply would reasonably be expected to achieve consensus.
12 Chainalysis, Glassnode, as of 2021.
13 The number of millionaires in the US is approximately 22 million. “Global Wealth Report 2024”, UBS.