As one of the world's largest asset management companies, BlackRock has become increasingly positive about Bitcoin and other crypto assets. From actively applying to promote Bitcoin spot ETFs at the beginning of the year to occupying a dominant position in Bitcoin spot ETF shares, its recognition of the cryptocurrency market is self-evident. Yesterday, it released a 9-page white paper, which elaborated on the unique status of Bitcoin as a major crypto asset and explained the unique value and significance of Bitcoin worldwide.
The following is a condensed version:
Is Bitcoin a "risk asset" or a "safe haven asset"? This is one of the most common questions users ask when investing in Bitcoin for the first time. We believe that Bitcoin's unique properties make it unsuitable for valuation using traditional financial frameworks, and its long-term return drivers are largely unrelated to the sources of return in other portfolios.
Although Bitcoin is volatile and has some short-term co-movement with the stock market (especially when there are drastic changes in U.S. dollar real interest rates or liquidity), its long-term correlation with stocks and bonds is low, and its long-term historical returns are significantly higher than all major asset classes.
In the long term, we believe that the drivers of Bitcoin adoption are likely to be very different from, and in some ways the opposite of, the global macro factors that drive most traditional financial assets, as detailed in this article.
Why is Bitcoin important?
First, we need to understand what fundamentally gives Bitcoin its importance. Since its creation in 2009, Bitcoin has become the first Internet-native monetary tool to be widely adopted worldwide. Its technological innovation has created a digitally native, global, scarce, decentralized, and permissionless form of money. It is these attributes and characteristics that have made Bitcoin a breakthrough in the field of money, solving the problems that have long plagued money in history:
1) Bitcoin has a hard-coded supply limit of 21 million coins, which means it will not depreciate easily.
2) Its global, digitally native nature means that it can be transmitted around the world in near real time and at almost zero cost, breaking down the barriers inherent in transferring value across political borders.
3) Its decentralized, permissionless nature makes it the world’s first truly open-access monetary system.
Although other crypto assets have been created since Bitcoin’s breakthrough, and in many cases pursue broader application scenarios, only Bitcoin , the leading crypto asset, has reached global consensus. It is this that makes Bitcoin unique in the crypto asset field, becoming a global currency alternative and an asset with credible scarcity.
Bitcoin’s Path to $1 Trillion Market Cap
Despite Bitcoin’s significant growth to date and widespread global adoption, it remains uncertain whether it will ultimately develop into a widespread store of value or global payments asset, and its changing market value reflects this uncertainty.
In the past 10 years, Bitcoin has outperformed all major asset classes in 7 years, with an annualized return of more than 100%. Even so, Bitcoin has been the worst performing asset in the other 3 years and has experienced four major drawdowns of more than 50%. However, through these historical cycles, Bitcoin has demonstrated the ability to recover from major drawdowns and set new highs, although these cycles are often accompanied by long bear markets.
These fluctuations in Bitcoin's price partly reflect its prospects of becoming a global alternative currency over time.
The data shows Bitcoin's price movement from July 19, 2010, to July 31, 2024, with the starting date marking the launch of the first Bitcoin exchange, Mt. Gox.
Source: Bloomberg Bitcoin spot price as of July 31, 2024.
Assets that are not correlated with macro variables
Bitcoin’s low fundamental correlation with other macro variables also explains its low long-term average correlation with stocks and other “risk assets.” Although there have been some brief periods when Bitcoin’s correlation has increased—particularly when there have been sudden changes in U.S. real interest rates or liquidity—these have been short-term phenomena and have failed to form a clear long-term statistically significant correlation relationship.
1) Bitcoin has a low historical correlation with US stocks and has experienced several periods of disconnection
As can be seen from the above figure:
A. Bitcoin and gold weekly returns 6-month lagged correlation with the S&P 500, data coverage period January 1, 2015 to July 31, 2024. Source: Bloomberg Bitcoin spot price, Bloomberg Gold spot price, S&P Global and BlackRock calculations, as of July 31, 2024.
B. Average 6-month lagged correlation of Bitcoin and gold weekly returns with the S&P 500, data covering the period from January 1, 2015 to July 31, 2024.
As the first decentralized, non-sovereign currency alternative, Bitcoin has no traditional counterparty risk, is not dependent on any centralized system, and is not driven by the economic conditions of any single country. These characteristics make it fundamentally unrelated to certain key macro risk factors (such as banking system crises, sovereign debt crises, currency devaluations, geopolitical turmoil, and other country-specific political and economic risks) .
In the long term, Bitcoin’s adoption path is likely to be driven by the degree of volatility in concerns about global monetary instability, geopolitical discord, U.S. fiscal sustainability, and U.S. political stability.
Due to these attributes, Bitcoin is viewed by some investors as a “safe haven asset” during times of panic, especially during some of the most disruptive global events of the past five years. Notably, during these events, Bitcoin exhibited a short-lived negative reaction in the early stages before recovering. In our view, these short-term trading reactions, which are often difficult to explain from a fundamental perspective, may be attributed to several factors:
A. As an asset that is traded around the clock and settled almost instantly, Bitcoin is highly marketable when liquidity is tight in traditional markets, especially during weekends.
B. The Bitcoin and crypto asset markets are still in a relatively immature stage, and investors’ understanding of Bitcoin is constantly evolving.
In most cases, including the recent global market sell-off on August 5, 2024, Bitcoin recovered to its prior levels within a few days or weeks, and in many cases rose further, as the market began to recognize the positive underlying impact of these disruptive events on Bitcoin's fundamentals.
2) How the S&P 500, gold, and Bitcoin perform during major geopolitical events
3) U.S. debt dynamics again draw attention
Against this backdrop, U.S. and global concerns about the U.S. federal deficit and debt situation have heightened interest in Bitcoin as a potential alternative reserve asset to hedge against future events that could affect the dollar . This trend also appears to be evident in other countries with significant debt accumulation. Based on our market experience, this explains an important reason for the recent broad-based increase in institutional interest in Bitcoin.
Yellow part: Total U.S. federal debt/trillion U.S. dollars
Red line: US deficit (-)/surplus (+) as a percentage of GDP
Bitcoin remains a risky asset
Although the previous analysis shows some characteristics of Bitcoin, this does not change the fact that Bitcoin as an independent asset is still highly risky. As an emerging technology, Bitcoin is still in the early stages of full-scale popularization and whether it can become a global payment asset or a value storage tool in the future is still uncertain. In addition, Bitcoin has experienced dramatic fluctuations and faces multiple risks such as regulatory challenges, uncertainty in the path of popularization, and an immature ecosystem.
However, the key point is that these risks are unique to Bitcoin and not common to traditional investment assets. Therefore, the simple "risk preference" and "risk aversion" framework may not be applicable to Bitcoin.
From a portfolio perspective, this is why Bitcoin can serve as a diversifier when held in moderation, while its high volatility can significantly increase portfolio risk when held in larger amounts.
Conclusion
While Bitcoin has shown some correlation with stocks and other “risk assets” in the short term, over the long term its fundamental drivers are significantly different from, and in many cases opposite to, those of most traditional investment assets.
As the global investment community faces increasing geopolitical tensions, concerns about the state of U.S. debt and deficits, and political instability around the world, Bitcoin may be seen as a unique asset that can hedge against some of the fiscal, monetary, and geopolitical risks that other assets in a portfolio may face.
