By addressing three key questions about return expectations and target portfolio volatility, multi-asset investors can assess whether Bitcoin should be included in their portfolios. They can also determine the optimal percentage allocation, if deemed appropriate, based on their specific return forecasts and volatility objectives.
Contrary to popular belief, Bitcoin's price is driven by demand rather than changes in its (mining) supply. Each of Bitcoin's five bull markets has been fueled by innovations in how investors acquire itโfrom creating early spot exchanges to leveraging tools like futures, uncollateralized borrowing, Spot Bitcoin ETFs, and now, options on these ETFs.
This progression highlights Bitcoin's growing integration with traditional financial markets, a trend accelerated by U.S. regulatory approvals from bodies like the CFTC and SEC, which have legitimized Bitcoin-related financial products over time.
The 2017 decision to maintain Bitcoin's 1-megabyte (MB) block size-resolved a prolonged debate within the Bitcoin community about how to scale the network. The block size limit was initially set to manage network congestion and preserve decentralization. By prioritizing decentralization over increased transaction throughput, this decision played a pivotal role in solidifying Bitcoin's identity as "digital gold.โ
This classification offers traditional finance investors a framework to understand Bitcoin's role as digital gold in portfolio management, as a risk mitigation tool, or as an inflation hedge. It also provides insight into Bitcoin's potential valuation trajectory. The total above-ground stock of gold is valued at approximately $18 trillion, with $8 trillion attributed to jewelryโan area Bitcoin is unlikely to replace.
However, Bitcoin could capture a share of the $4 trillion in private investments (bars and coins), $3.1 trillion in central bank reserves, and $2.7 trillion in other uses, such as industrial applications and holdings by financial institutions. This $10 trillion segment of the gold market represents a potential target for Bitcoin. With Bitcoin's current market valuation at $2 trillion, this suggests a plausible 5x growth potential as it continues to position itself as digital gold.
Significant differences exist between gold and Bitcoin ownership. Approximately 1bn people own gold as jewelry, and another 150m hold it as an investment, either directly through bars and coins or indirectly via financial instruments like ETFs.
In contrast, Bitcoin ownership is already estimated to be higher, with as many as 600m individuals holding it as an investment. This gap is expected to widen, as studies and surveys show that 25% of Millennials are cryptocurrency holders (including Bitcoin), compared to only 4% of Baby Boomers.
Read the full report (no paywall): https://mail.10xresearch.co/p/the-optimal-bitcoin-allocation-in-multi-asset-portfolios
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