BlackRock’s Insights on Bitcoin as a Unique Diversifier

Last week, BlackRock, a leading investment management corporation, published a comprehensive report titled “Bitcoin as a Unique Diversifier.” This report provides valuable insights into the characteristics of Bitcoin (BTC) and its potential role within traditional financial assets. Below, we explore the four key points highlighted in their analysis and elaborate on the implications of Bitcoin’s behavior in the investment landscape.

Understanding Bitcoin’s Fundamental Properties

BlackRock emphasizes the importance of analyzing Bitcoin in the context of traditional financial assets. Unlike conventional assets, Bitcoin does not have a quarterly earnings report, nor does it have a CEO or a central governing body. This unique nature makes Bitcoin challenging to evaluate through standard financial metrics. Instead, investors must assess Bitcoin through its fundamental properties, such as its scarcity, decentralized structure, and the technology that underpins it—the blockchain.

Bitcoin’s Volatility: Risk-On or Risk-Off?

One of the most discussed aspects of Bitcoin is its volatility. Bitcoin’s price fluctuations can lead to perceptions of it being a “risk-on” asset, meaning it is more appealing during bullish market conditions. However, BlackRock argues that Bitcoin can also function as a “risk-off” asset, particularly in times of economic uncertainty. This duality is significant; during periods of geopolitical instability or market downturns, Bitcoin may serve as a flight-to-safety option for investors seeking to preserve capital.

Historically, Bitcoin’s realized volatility has shown a downward trend. In its early years, Bitcoin’s realized volatility often exceeded 200%. However, as the asset has matured and gained wider acceptance, its volatility has decreased. Since 2018, realized volatility has not surpassed 100% and currently stands at around 50%. This reduction in volatility, coupled with increased liquidity through financial instruments such as spot and futures markets, may attract more sophisticated investors, including options traders. The recent approval of physically settled options tied to BlackRock’s spot Bitcoin ETF by the U.S. Securities and Exchange Commission (SEC) marks a significant step in this direction.

Long-Term Holding Mentality Among Investors

BlackRock poses an intriguing question: Is Bitcoin a risk-on or risk-off asset? While short-term trading behavior may suggest Bitcoin functions as a risk-on asset, long-term data indicates a different perspective. Insights from Bitcoin custody service Unchained reveal that over 99% of Bitcoin holders are in profit if they maintain their investment for a mere three years. Furthermore, all Bitcoin holders who have held their assets for at least five years are also in profit. This long-term holding mentality reflects a broader belief in Bitcoin’s potential as a store of value, akin to gold.

On-chain data from Glassnode corroborates this sentiment, showing that over 65% of circulating Bitcoin has remained untouched for more than a year. This trend reinforces the notion that many investors view Bitcoin not merely as a speculative investment but as a safeguard against inflation and economic instability. Despite Bitcoin experiencing several corrections exceeding 20% in 2024, the commitment of long-term holders suggests a strong belief in its fundamental value.

Low Correlation with U.S. Equities

Another critical finding in BlackRock’s report is Bitcoin’s historically low correlation with U.S. equities. The report presents a graph illustrating the trailing 6-month correlation between Bitcoin and the S&P 500, revealing an average correlation of just 0.2 since 2015. This low correlation indicates that Bitcoin and traditional equities do not consistently move in tandem, which is particularly valuable for portfolio diversification.

While there may be temporary episodes where Bitcoin and equities exhibit a one-to-one correlation due to macroeconomic factors or liquidity events, these occurrences have been short-lived and have not established a clear long-term correlation. Investors seeking to diversify their portfolios may find Bitcoin’s unique behavior attractive, as it can provide a hedge against traditional market movements.

Bitcoin’s Performance Post-Geopolitical Events

Continuing the discussion on Bitcoin’s long-term performance, BlackRock notes that Bitcoin often outperforms other risk-on assets following major geopolitical events. Analyzing historical data, the report shows that Bitcoin tends to deliver positive returns 60 days after such events, showcasing its resilience and potential as a strategic asset during times of crisis.

• During the U.S.-Iran escalation in 2020, Bitcoin returned 20% after 60 days, outperforming both gold and the S&P 500.
• Similar trends were observed following the COVID-19 outbreak, the 2020 U.S. election challenges, and the Russian invasion of Ukraine.
• Most recently, following the Yen carry trade unwind on August 5, Bitcoin rose by 22%, while gold and the S&P 500 only increased by approximately 11%.

This consistent pattern of outperformance suggests that Bitcoin may serve as a valuable asset for investors looking to navigate uncertain economic climates and capitalize on potential market rebounds. As more investors recognize Bitcoin’s potential as a unique diversifier, its role in investment portfolios may continue to evolve.

Conclusion

In summary, BlackRock’s report sheds light on Bitcoin’s multifaceted nature as an investment asset. Its unique properties, decreasing volatility, low correlation with traditional equities, and potential for long-term value retention position Bitcoin as a compelling option for investors seeking diversification. As the financial landscape evolves, Bitcoin’s role will likely become increasingly significant, particularly in times of global instability.