The Investment Case for Bitcoin
March 31, 2021
Read Time 3 MIN
Learn more about how bitcoin fits within an investment portfolio and the impact of an allocation to bitcoin. View the full presentation: The Investment Case for Bitcoin.
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 (02/01/2012 – 03/31/2021)
Source: Morningstar. Data as of March 31, 2021. 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.
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 while only minimally impacting its volatility.
Asymmetric Return Profile (2/1/2012 - 03/31/2021)
Source: Morningstar. Data as of 03/31/2021.
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,” May 13, 2021.
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. Given the scarcity induced by halvings, the price of bitcoin has historically increased following halvings.
Bitcoin Growth of 100 (2/1/2012 - 03/31/2021)
Source: Cryptocompare. Data as of 03/31/2021.
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 7/13/2019.
This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the cryptocurrencies mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. 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. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
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The S&P® 500 Index: a float-adjusted, market-cap-weighted index of 500 leading U.S. companies from across all market sectors. The Bloomberg Barclays U.S. Aggregate Bond TR Index: is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency). The Bloomberg Barclays EM Local Currency Government TR Index: is a flagship index that measures the performance of local currency Emerging Markets (EM) debt. Classification as an EM is rules-based and reviewed annually using World Bank income group, International Monetary Fund (IMF) country classification and additional considerations such as market size and investability. The MSCI US REIT Index: is a free float-adjusted market capitalization index that is comprised of equity REITs and represents about 99% of the US REIT universe and securities are classified in the Equity REITs Industry (under the Real Estate sector) according to the Global Industry Classification Standard (GICS®). It however excludes Mortgage REIT and selected Specialized REITs. The S&P GSCI Gold Index: Is a sub-index of the S&P GSCI, provides investors with reliable and publicly available benchmark tracking the COMEX gold future. The index is designed to be tradable, readily accessible to market participants, and cost efficient to implement. The MVIS CryptoCompare Bitcoin Index measures the performance of a digital assets portfolio which invests in Bitcoin. The MVIS CryptoCompare Bitcoin Index is the exclusive property of MarketVector Indexes GmbH (a wholly owned subsidiary of the Adviser).
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