An article in Institutional Investor quotes a recent interview with Ark CEO Cathie Wood with CNBC: “The move by institutional investors into Bitcoin could add $500,000 to its price, if they ultimately give it a 5% allocation.” But the key to a higher Bitcoin price is more acceptance by Wall Street, and the key to more acceptance is more regulation, the article argues.
Without a higher level of safety or regulation, investors won’t move to make the full Bitcoin allocation. Given that there’s bipartisan support in the federal government for cryptocurrency regulation, it’s likely only a matter of time before the SEC brings all investable digital assets under its eye. Note that there’s a distinction between cryptocurrency and crypto tokens; the former is a commodity with futures contracts in the U.S. while the latter are issued on an existing blockchain that’s not registered with the SEC.
Reducing U.S. stocks by 5% in a diversified portfolio and allocating those funds to Bitcoin can generate high risk-adjusted returns: a balanced Bitcoin portfolio shows an average annualized return of 20.73% since 2010. But with those returns comes the risk of volatility. Over the last 100 days Bitcoin has roller-coastered up and down 3.2% per day—5.5x higher than the S&P 500 average daily price move of 0.57%. And in three periods since 2011 Bitcoin suffered catastrophic declines after a period of massive gains.
Looking at Bitcoin’s correlation to other assets, it’s can be attractive because it can hold its value when assets decline. But the Catch-22 here is that as Bitcoin is included in more institutional portfolios and given more allocation, those correlations—both up and down—will rise.
With a boost from increased regulation, the prospect for Bitcoin as an asset class are bright, the article concludes. And as for Wood’s recommendation of a 5% allocation, Institutional Investor writes that “a 5% allocation to a portfolio should lift risk-adjusted returns over the next ten years,” and that balancing volatility with diversification and buying in after a major correction would be a smart strategy.
