Asset manager BlackRock sent a 9-page document to its clients on Sept. 18 that portrays Bitcoin (BTC) as a “unique diversifier” for portfolios.
The document highlighted the characteristics that make Bitcoin distinct from traditional asset classes on any long-term basis and suggested a “modest allocation.”
Although BTC moves with equities in the short term, as happened in early August with the Yen carry trade, which caused BTC to crash 7% in one day, BlackRock analysts highlighted that Bitcoin was quick to rebound to previous price levels.
Additionally, the document stated that Bitcoin cannot be labeled as a risk-on or risk-off asset under most traditional finance frameworks, given its characteristics as a global, decentralized, and non-sovereign asset with a fixed supply.
Uncorrelated and extraordinary returns
BlackRock proceeded to explain to new investors the story of how Bitcoin was created, the dynamics of its fixed supply, and its path to a $1 trillion market cap.
The document pointed out that BTC has outperformed major asset classes in seven out of the last 10 years. It also highlighted the over 100% annualized return that Bitcoin gave investors over this period, calling it “extraordinary.”
Furthermore, the document highlighted Bitcoin’s resilience to recover from major corrections despite its volatility, stating:
“This performance was achieved despite Bitcoin also being the worst performing asset in the other three of those 10 years, with four drawdowns in excess of 50%. Through these historical cycles, it has shown an ability to recover from such drawdowns and reach new highs, despite these extended bear market periods.”
The document also reiterated that Bitcoin has no statistical correlation with equities in the long term, even though the relationship spikes in the short term.
Flight to safety
BlackRock also told its investors that Bitcoin is largely unaffected by critical macro risk because it is a decentralized and non-sovereign monetary alternative. These macro “black swan” events include banking system crises, sovereign debt crises, currency debasement, and geopolitical disruption.
The document reiterated BlackRock CEO Larry Fink’s remarks from October 2023, when he stated that a BTC rally at the time was a “flight to quality.”
Additionally, it explained that Bitcoin could be used as a hedge against possible US dollar instability, as federal debt and deficit fears make alternative reserve assets more appealing to investors.
Despite the various compliments on Bitcoin’s characteristics and strengths, BlackRock analysts said that Bitcoin is still a risky asset on its own. They added that the risks are not just related to volatility but also to regulatory uncertainties and its underlying technology.
Nevertheless, in a traditional “60/40 portfolio” divided between equities and bonds, the document suggested that modest allocations to Bitcoin can enhance risk-adjusted returns, while larger allocations may increase volatility.
