• Digital Assets

    The Investment Case for Bitcoin

    Gabor Gurbacs, Director, Digital Assets Strategy

    We often refer to bitcoin as “digital gold” because, like the metal, it is a potential store of value. To determine if bitcoin has value, it is important to start with an understanding of the two types of value:

    • Intrinsic value exists because an economic good—such as equities, real estate and consumable commodities like corn and oil—produces cash flow or has overt utility.
    • Monetary value exists despite an economic good not having intrinsic value or because it has value beyond its intrinsic value. Examples include gold and other precious metals, artwork and gemstones.

    Adding Bitcoin to an Investment Portfolio

    If bitcoin is increasingly used as an asset with monetary value, what role might it play within an investment portfolio?

    Bitcoin may potentially increase portfolio diversification because of its low correlation to traditional asset classes, including broad market equity indices, bonds and gold.

    Correlation (1/2/2012 – 31/7/2019)

      S&P 500 U.S. Bonds Bitcoin Gold U.S.
    Real Estate
    Oil Emerging Markets
    S&P 500 - -0.28 0.01 -0.04 0.59 0.32 0.29
    U.S Bonds -0.28 - 0.03 0.26 0.12 -0.17 0.09
    Bitcoin 0.01 0.03 - 0.03 0.04 -0.05 -0.01
    Gold -0.04 0.26 0.03 - 0.07 0.09 0.31
    U.S. Real Estate 0.59 0.12 0.04 0.07 - 0.12 0.27
    Oil 0.32 -0.17 -0.05 0.09 0.12 - 0.23
    Emerging Markets Currencies 0.29 0.09 -0.01 0.31 0.27 0.23 -

    Source: Morningstar. Data as of 31 July 2019. U.S. Bonds is measured by the Bloomberg Barclays US Aggregate Index; Gold is measured by the S&P GSCI Gold Spot Index; U.S. Real Estate is measured by the MSCI US REIT Index; Oil is measured by the Brent Crude oil spot price, Emerging Market Currencies is measured by the Bloomberg Barclays EM Local Currency Government Index.

    Despite the relevant market risk, liquidity risk and cybersecurity risk, an allocation to bitcoin may also enhance the risk and return reward profile of institutional investment portfolios. As seen in the chart below, a small allocation to bitcoin significantly enhanced the cumulative return of a 60% equity and 40% bonds portfolio allocation mix. However, its impact on the volatility of the portfolio should not be neglected, as bitcoin is still a nascent asset with wild price swings.

    Asymmetric Return Profile (1/2/2012 - 31/7/2019)

    Source: Morningstar. Data as of 31/7/2019.

    A look at the stock to flow ratio1 may also offer a view of bitcoin’s growth potential. The below stock to flow data suggests that bitcoin may have potential to grow, based on historical data and the scarcity characteristics of bitcoin, gold and silver.

    Why Bitcoin Has Value: Scarcity

    Source: Medium, “Modeling Bitcoin’s Value with Scarcity,” 22 March 2019.

    Furthermore, bitcoin has “halvings” programmed into it. A halving is defined as a 50% block reward cut to bitcoin production rate, and they occur roughly every four years, with the next halving expected in May 2020. Given the scarcity induced by halvings, the price of bitcoin has historically increased following halvings.

    MVIS CryptoCompare Bitcoin Index (1/2/2012 - 31/7/2019)

    Source: Morningstar. Data as of 31/7/2019.

    Bitcoin Adoption Continues

    Bitcoin transactions have crossed 400,000 permission-less transactions per day, exhibiting significant network value.2 When looking at off-chain adoption and the number of applications being built on Bitcoin, we see a natural evolution taking place.

    Sidechains (such as Liquid by BlockStream) may be the next step in boosting Bitcoin adoption as they allow for scalability and customizations while retaining many of Bitcoin’s security properties. Built on top of the Bitcoin-blockchain, we believe the Lightning Network pushes the boundaries of Bitcoin payment capabilities with lower costs and faster speeds. Taking advantage of Bitcoin’s trust-minimized features, Microsoft is building a decentralized identity platform on the Bitcoin-blockchain.

    1 The stock to flow ratio is defined as the amount of an asset that is held in reserves divided by the amount of that asset produced for a selected time period.

    2 Source: Blockchain.info. Data as of 13/7/2019.

  • Important Disclosure

    For informational and advertising purposes only.

    This information originates from VanEck (Europe) GmbH which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin). The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice. VanEck (Europe) GmbH and its associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. All indices mentioned are measures of common market sectors and performance. It is not possible to invest directly in an index.

    All performance information is historical and is no guarantee of future results. Investing is subject to risk, including the possible loss of principal. You must read the Prospectus and KIID before investing.

    No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

    © VanEck (Europe) GmbH


  • Authored by

    Gabor Gurbacs
    Director, Digital Assets Strategy

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