Breaking Tradition: Bitcoin is Earning a Place in Balanced Portfolios
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Breaking Tradition: Bitcoin is Earning a Place in Balanced Portfolios
Compared to completely ignoring the asset, allocating a small portion of bitcoin in a portfolio would be a more prudent choice.
Navigating Web3 tides with focused insightsSource: Bloomberg
Translation: BitpushNews Yanan
The recent cryptocurrency price rebound proves that even skeptical investors should recognize this: allocating a small portion of bitcoin in an investment portfolio is a more prudent choice than completely ignoring the asset.
This week, bitcoin sold for over $44,000, more than doubling its price from March 13. According to market analysis, this performance isn't particularly surprising. Looking back since 2014, bitcoin has typically doubled approximately every nine months and twenty-one days; this time, it achieved the milestone twenty-eight days earlier.
However, what's slightly surprising is that during this doubling phase, bitcoin did not fall below its March 13 low. Normally, between each doubling, bitcoin experiences an average drawdown of 27% (for example, falling from $1,000 to $730 before rising above $2,000), with maximum declines reaching as high as 83% (dropping to $170 before climbing to $2,000).
Nevertheless, bitcoin’s rollercoaster-like volatility belongs to the past. Since the peak volatility during the pandemic, bitcoin’s annualized volatility has stabilized around 50%, comparable to many large technology stocks. More importantly, despite numerous scandals, bankruptcies, lawsuits, and regulatory controversies within the broader cryptocurrency sector, bitcoin has demonstrated relatively stable pricing.
Does this mean bitcoin can now earn a seat at the table during this year’s holiday dinner—and within standard investment portfolios?
For most investors, the answer remains “no.” Bitcoin possesses sufficient upside potential to attract interest, and its volatility no longer appears to be a major deterrent. Issues such as asset custody security, tax treatment, and legality seem largely resolved. However, bitcoin’s unstable correlation with other major assets—particularly stocks, currencies, and gold—makes it difficult to integrate into portfolios, much like a left-handed guest awkwardly navigating a formal dinner setting.
As early as 2011, I estimated that cryptocurrency market capitalization would reach 3% of the global economy. As an efficient-market investor, regardless of market volatility or sharp price swings, I have consistently allocated 3% of my net worth to cryptocurrencies. However, most investors prefer asset classes where fundamental developments are somewhat predictable and favor long-term holding rather than frequent short-term trading. (Disclosure: The author has venture investment and consulting relationships with cryptocurrency companies.)
Bitcoin originally existed as a transactional currency—that was its initial value proposition. It proved far more efficient than traditional financial systems in facilitating international transfers and serving unbanked or financially oppressed populations.
Additionally, bitcoin facilitated recreational drug sales, prostitution, and gambling—criminal activities rarely prosecuted. Despite the widespread misconception that bitcoin is frequently used for serious crimes such as terrorism or contract killings, this is untrue because bitcoin transactions are public and immutable. Indeed, bitcoin transactions are pseudonymous, but investigators can usually trace them back to individuals through pattern analysis. For serious criminals, government-issued cash, gold, diamonds, or privacy-focused cryptocurrencies like Monero or Zcash remain preferred tools for concealing identities.
During this week’s Senate Banking Committee hearing, Senator Elizabeth Warren joined JPMorgan CEO Jamie Dimon and other bankers in calling for anti-money laundering controls on cryptocurrencies. While laws can make fiat on-ramps and off-ramps linked to criminal activity difficult, they cannot prevent or track direct transfers between privacy-preserving cryptocurrencies. Ironically, the very financial suppression mechanisms designed to combat money laundering are one reason why both legitimate users and criminals turn to cryptocurrencies.
But this no longer matters for bitcoin, as its use case and value proposition as a transactional currency have already collapsed. Fundamental improvements in traditional finance, along with increased government regulation and crackdowns on criminal uses of crypto, have contributed to bitcoin’s shift away from being a transaction or transfer tool. Moreover, the biggest reason for the erosion of bitcoin’s original role as a transactional currency is the emergence of innovative cryptocurrencies like Ripple or Nano, which vastly outperform bitcoin in transaction efficiency.
Around 2015, bitcoin’s value proposition shifted from “transactional currency” to “digital gold.” Bitcoin would become the anchor of value in the cryptocurrency ecosystem—the bridge for converting traditional money into and out of crypto—much like how gold historically served as the value anchor for paper currencies in central bank settlements.
From this perspective, bitcoin’s value depends on three factors: the ultimate value of crypto projects, the volume of traditional money flowing into and out of cryptocurrencies, and whether financial services within the crypto economy (as alternatives to traditional banking) prove superior.
The first factor—the ultimate value of crypto projects—is essentially a form of technological venture capital. On one hand, many exciting ideas could transform the world and be worth trillions; on the other, their actual revenues or profits measured in traditional currency remain minimal.
The volume of traditional money entering and exiting cryptocurrencies has always been influenced by economic booms and busts—or, in crypto jargon, summers and winters. During crypto summers, substantial capital flows in, though many participants also cash out partial gains. Additionally, people use bitcoin to move funds between different crypto projects. In crypto winters, capital movement slows in both directions, reducing demand for bitcoin-based financial services.
The most stable element lies in competition within financial services. Bitcoin has rapidly strengthened its integration with publicly traded futures and options, efficient lending, secure custody, and other components of modern finance. If, as expected, the U.S. Securities and Exchange Commission approves a bitcoin ETF in January, the entire bitcoin financial ecosystem will improve further. Investors will be able to conduct investment, financing, hedging, speculation, exchange, and holding activities on bitcoin similar to those available with stocks and bonds—all executed efficiently. Furthermore, bitcoin provides a fast on-ramp to the broader crypto economy.
By comparison, stablecoins have succeeded only in specific niches. Among other cryptocurrencies, only Ethereum has developed a native financial system, yet it still lags significantly behind bitcoin. Traditional financial institutions attempting to leverage blockchain and other crypto technologies have also seen success only in limited areas, without threatening bitcoin’s dominance. Meanwhile, attempts by firms like FTX and Celsius Network to embed financial services directly into crypto ecosystems collapsed spectacularly in 2022, casting a negative shadow over similar ventures.
These three-stage value propositions explain bitcoin’s unstable correlations with other traditional financial assets.
The market value of crypto projects depends heavily on investor enthusiasm for tech entrepreneurship, showing high correlation with technology stocks. Yet investor appetite for putting money into crypto often moves inversely to tech stocks—disappointing returns in tech equities drive optimists and risk-takers toward cryptocurrencies.
The latest doubling in bitcoin’s price appears primarily tied to growing regulatory clarity and tolerance—but this trend does not seem to extend to stablecoins or other cryptocurrencies. This not only enhances the efficiency of bitcoin’s financial infrastructure but also shields it from competitive threats. Typically, there is no clear correlation between regulatory sentiment and asset prices.
Currently, no specific factors appear to influence the success of crypto projects or public enthusiasm for crypto trading. Thus, bitcoin’s near-term outlook seems to hinge largely on regulatory developments—especially the approval of a spot bitcoin ETF. Additionally, the risks of market corrections or black swan events persist, particularly amid new crypto scandals.
Competition from stablecoins, traditional finance, and native crypto institutions remains negligible, so progress in these areas will likely only negatively impact bitcoin. I suspect bitcoin’s next doubling may be driven by the long-awaited emergence of a “killer app” in crypto—one that draws millions to learn and use cryptocurrencies not merely for holding or trading, but for practical applications. Alternatively, problems in the traditional financial system—such as crises, tighter regulations, inflation fears, or credit crunches—could make bitcoin relatively more attractive.
We are gradually reaching a consensus: even traditionally conservative investors who remain cautious about cryptocurrencies should acknowledge that allocating a small amount of bitcoin in a portfolio is a more prudent strategy than complete avoidance. Although cryptocurrencies still carry the risk of going to zero, their potential upside is significant enough that portfolios entirely insulated from this asset class may appear unbalanced.
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