With bitcoin crossing the $100,000 mark, the largest money manager on the planet, New York City-based BlackRock appears to be falling down a crypto rabbit hole. In a new release from Blackrock Investment Institute called “Sizing Bitcoin In Portfolios” its analysts are making the case that the cryptocurrency, long shunned by mainstream investors, should now account for 1% to 2% of traditional “60/40” investment portfolios.
This would position the asset similarly to companies like Nvidia, Amazon, or Apple even though bitcoin has little utility other than as a speculative asset, and it derives no revenues from products like corporate titans. More than $5.2 trillion of Blackrock’s $11.5 trillion in assets under management are equities, which includes ETFs like iShares Core S&P 500 ETF (IVV) with $576 billion in assets. Allocating a mere 1% of Blackrock’s equity assets to bitcoin would equate to about $50 billion in net new demand for the digital asset. In the last 12 months bitcoin’s price has gained more than 130% compared to a gain of 32% for the S&P 500.
In the research report, analysts led by the Chief Investment Officer of ETF and Index products Samara Cohen, write that the $2 trillion cryptocurrency offers a similar risk profile to the Magnificent 7 firms, whose average market capitalization is $2.5 trillion and have accounted for nearly 35% of the S&P 500’s $46 trillion market capitalization. “[Those stocks] provide an example of single portfolio holdings that account for a comparatively large share of portfolio risk. They differ from bitcoin in many ways, but these two factors make them a useful starting point for assessing the risk of a single holding.” Bitcoin has a total market capitalization of about $2 trillion.
The BlackRock report also points out bitcoin’s historically low-correlation to traditional markets. Notes Cohen, “All equity managers who use a benchmark with the Magnificent 7 have this concentration risk, and they face a question of what to do about it. We are proposing this framework to think about an allocation that strikes the right balance, given the huge price volatility of Bitcoin, to maximize its potential as a diversifier while minimizing its contribution to overall portfolio risk.”
While bitcoin was highly correlated to other asset classes, technology stocks, during the covid boom and bust, a divergence began in June 2023. The report suggests that this pattern will continue because of factors impacting bitcoin like the global fragmentation of the financial system, growing geopolitical tensions, a lack of confidence in banks, and growth in deficits.
“You had 2022, a huge negative event, and then given the [high] level of interest rates in 2023, you could maintain a highly defensive posture with minimal risk primarily by holding cash-like instruments in your portfolio,” says Cohen. “In 2024, you have to face the reality of reinvestment risk, lower rates, and needing a long-term asset allocation.”
In their analysis, Cohen and her team found that a 1-2% allocation in a 60/40 portfolio yields a risk profile similar to that of a Magnificent 7 stock. Bitcoin’s excessive volatility, however, which has caused it to drop as much as 70% in a year, makes higher weighting imprudent. A 1% weighting would contribute 2% of risk, while a 2% allocation increases the risk weighting to 5%. Another doubling in the weighting to 4% would account for an exponentially higher 14% of overall risk, according to the report.
Though Blackrock only recommends a maximum of 2% as appropriate for most investors it does hint that future price gains may be more difficult. “The return characteristics are likely to change significantly once we reach a target state where potentially the portfolio allocation is much more tactical like gold and is used for hedging with a very different set of characteristics,” says Cohen.
Increasing investor demand and rising bitcoin prices are already good business at Blackrock. In 2022, it partnered with Coinbase to enable institutional clients to buy bitcoin, and today, it operates the world’s largest bitcoin ETF, the iShares Bitcoin Trust (IBIT), with $50.8 billion in assets under management.
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