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The Investment Case for Bitcoin

September 11, 2023

Read Time 8 MIN

Learn more about how Bitcoin fits within an investment portfolio and the impact of an allocation to Bitcoin.

Please note that VanEck has exposure to Bitcoin.

We often refer to Bitcoin as “digital gold” because, like the metal, it is a potential store of value. Like gold, Bitcoin’s characteristics include:

  • Limited supply: Maximum supply of 21 million. This scarcity means that the price could move upward as adoption increases.
  • Increasing adoption: Bitcoin has been gaining traction in terms of the number of merchants that accept it as payment. In 2021, El Salvador made headlines by declaring Bitcoin as legal tender. As the first country to do so, El Salvador serves as a good macro case study for Bitcoin as legal tender.
  • Potential inflation hedge: Monetary stimulus is currently eroding purchasing power globally and Bitcoin might outperform as it’s not subject to the same inflationary manipulation as traditional currencies.
  • Portfolio diversification benefits: Bitcoin is an uncorrelated asset.

However, unlike gold, Bitcoin is:

  • Divisible and transparent.

Bitcoin’s Limited Supply Creates Scarcity and May Increase Its Value Over Time

There will only ever be 21 million Bitcoin in existence. This supply cap was designed intentionally and is one of the primary characteristics of Bitcoin. Furthermore, Bitcoin has “halvings” programmed into it. A halving is defined as a 50% block reward cut to the Bitcoin production rate, and they occur roughly every four years. This means that the rate at which new Bitcoins are introduced into circulation slows down over time until it eventually reaches zero (estimated to occur around the year 2140).

Bitcoin Halvings are Typically Associated with Explosive Returns

Bar chart showing return percentage for Bitcoin with a line chart overlay showing Bitcoin price peaks

Source: Bloomberg Intelligence. Past performance is not a guarantee of future results. Not a recommendation to buy or sell any of the names mentioned herein.

These halvings increase the difficulty of mining Bitcoin and will occur until the supply cap is reached. In addition, the built-in finite supply of Bitcoin means that it is not subject to inflation in the same manner that fiat currencies are. Central banks around the world have ushered in unprecedented growth in money supply, effectively eroding their currencies’ purchasing value. In comparison, Bitcoin’s limited supply and increased mining difficulty over time may support the idea of Bitcoin as a long-term store of value and as an alternative to gold.

The next halving is expected to occur in April 2024. Historically, the price of Bitcoin has rallied leading up to and following a halving. The chart below indicates that the current cycle is very similar to the previous cycles that occurred in 2013 and 2017.

Previous Cycles Suggest That Bitcoin Could Rally Prior to and After the Next Halving

Line chart showing Bitcoin price performance in previous cycles as well as the current cycle

Source: Morningstar, Arcana. Data as of 8/31/2023. Past performance is no guarantee of future results.

Bitcoin Adoption Continues

In its early years, Bitcoin was largely used by a small group of tech enthusiasts. It was difficult and cumbersome to obtain with limited use cases and very few merchants accepting it as a form of payment. In 2023, Bitcoin adoption has grown substantially as it has become more mainstream. Now, more than ever, merchants and businesses are accepting Bitcoin as a form of payment and infrastructure has been built to make it more convenient for the average person to use. The development of user-friendly wallets, exchanges, and marketplaces has removed the technical barriers to entry that existed in Bitcoin’s early years.

Bitcoin interest among institutional investors has also increased. Hedge funds, asset management firms, and endowments are increasingly recognizing Bitcoin’s potential as a store of value and as an effective portfolio diversifier, specifically, when looking through the lens of an uncorrelated asset that has the potential to hedge against inflation. Approximately $50B worth of Bitcoin are now held by ETFs, countries, public and private companies.

BTC Holdings in Publicly Traded, Private Companies, ETFs and Countries

Bar chart showing the value of Bitcoin held by ETFs, countries, public companies and private companies

Source: Buybitcoinworldwide as of 9/7/2023. Past performance is not a guarantee of future results.

Layer 2s (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.

One notable upcoming layer 2 development on the Bitcoin network is RGB. This development is important because it enables the creation and management of digital assets on top of the Bitcoin blockchain. Assets such as stocks, bonds, real estate, or even other cryptocurrencies can be issued and traded on top of the Bitcoin network, adding a new layer of functionality. The RGB protocol is designed to be scalable and not resource-intensive, allowing users to create and manage digital assets without requiring extensive changes to the underlying Bitcoin network. It can be integrated into existing Bitcoin wallets and infrastructure, thus making it easier for developers and users to create and manage digital assets. RGB has the potential to expand the use cases of Bitcoin, making it a more versatile and useful platform for developers and users alike, ushering in new opportunities for innovation and growth within the ecosystem.

Potential Hedge Against Inflation

The unprecedented worldwide growth in money supply following the COVID-19 pandemic led to widespread inflation, eroding the purchasing power of established fiat currencies. Bitcoin’s role as a potential hedge against inflation has increasingly become a talking point central to investment decision-making. As previously alluded to, the cornerstone of this idea lies in its limited supply and decentralized nature. Unlike fiat, which can be printed by governments and central banks, Bitcoin has a fixed supply, with supply growth decreasing by 50% every 4 years with the halving events. Bitcoin is not subject to the same inflationary pressures caused by fiat money supply growth, making it an attractive option for investors concerned about the impact of inflation on their portfolios and their subsequent purchasing power.

Bitcoin’s decentralized nature makes it impervious to geopolitical events or economic policies that may lead to currency devaluation, such as QE (quantitative easing) or excessive government spending.

Bitcoin’s Role in 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.

Bitcoin Correlation with Nasdaq Has Fallen Considerably

Bloomberg chart showing the correlation between Bitcoin and Nasdaq

Source: Bloomberg as of 8/31/2023. Past performance is not a guarantee of future results.

An allocation to Bitcoin may also enhance the risk-return profile of institutional investment portfolios. As shown in the chart below, a small allocation to Bitcoin significantly enhanced the cumulative return of a traditional 60% equity and 40% bond portfolio allocation mix while only minimally impacting overall portfolio volatility.

Improved Portfolio Upside From a Small Bitcoin Allocation

(2/1/2012 - 8/31/2023)

Line chart comparing portfolio performance with different allocations to Bitcoin included

Source: Morningstar. Data as of 08/31/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities mentioned herein, to adopt any investment strategy, or as any call to action. Index performance is not representative of fund performance. It is not possible to invest directly in an index. Please see important disclosures at the end of this commentary regarding hypothetical performance.

  1 year
3 year
5 year
Since Inception
Since Inception
Std Dev
Since Inception
Since Inception
Sharpe Ratio
S&P 500 Index 15.94 10.52 11.12 13.43 20.55 -33.79 0.90
Bloomberg Barclays US Aggregate Index -1.19 -4.41 0.49 1.31 5.04 -18.41 0.09
60% Equities / 40% Bonds 9.04 4.57 7.14 8.68 12.17 -21.54 0.93
59.75% Equities / 39.75% Bonds / 0.5% Bitcoin 9.20 4.82 7.37 9.37 10.13 -21.64 1.02
58.5% Equities / 38.5% Bonds / 3% Bitcoin 10.01 6.03 8.52 12.79 10.53 -22.21 1.39
Bitcoin 30.94 30.81 30.24 110.93 155.11 -90.99 1.23

Source: Morningstar. Data as of 08/31/2023. Past performance is no guarantee of future results. Not intended as a recommendation to buy or sell any securities mentioned herein, to adopt any investment strategy, or as any call to action. Index performance is not representative of fund performance. It is not possible to invest directly in an index. Please see important disclosures at the end of this commentary regarding hypothetical performance.

The chart below indicates the % of digital assets outperforming Bitcoin historically. Digital asset price dispersion has been reaching extreme levels so far YTD. This gap in performance was influenced by two key events. First, on June 2, 2023, Patrick McHenry proposed guidelines for classifying cryptocurrencies as securities or commodities. Then, on June 5, the SEC sued Binance and Coinbase for allegedly operating as unregistered securities exchanges and brokerages, prompting Bitcoin to outperform as speculation grew that other digital assets would de-listed from the popular exchanges.

Bitcoin Outperformance YTD

Line chart showing the percentage of digital assets outperforming Bitcoin

Source: Bloomberg, Coingecko as of 6/25/2023. Past performance is not a guarantee of future results. Not a recommendation to buy or sell any of the names mentioned herein.

How Might Bitcoin Shine Brighter Than Gold?

While Bitcoin shares some of the characteristics attributed to gold, below are differences that, in our view, potentially make it superior.

  1. Divisible: As a physical asset, gold can only be divided into smaller units to a certain extent, making smaller transactions cumbersome and, in some instances, impractical. Bitcoin, on the other hand, is divisible up to eight decimal places (with the smallest unit called Satoshis), making it easier to use for microtransactions.
  2. Transparency: All transactions that have ever occurred or will occur are publicly available on the Bitcoin blockchain. This feature makes it difficult to manipulate and impossible to counterfeit Bitcoin, increasing trust in the network. Gold lacks the same level of transparency – when it is traded, the details of the transaction, such as the buyer, seller, and price, are often not publicly available. This lack of transparency may make it more difficult to verify the authenticity of the gold being traded and may lead to an increased risk of fraud and manipulation.

Overall, while gold has been used as a store of value and in transactions for centuries all over the world, its lack of transparency can make it more challenging to verify and track compared to digital assets like Bitcoin. As inflation poses challenges to investors globally, both gold and Bitcoin are likely to come front and center as potential hedges to protect purchasing power. With Bitcoin’s benefits like divisibility and transparency, we see it as a competitor to gold, and believe it is likely to garner even more adoption among retail and institutional investors alike.

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Bitcoin (BTC) is a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer Bitcoin network without the need for intermediaries.

RGB is client-side validated state and smart contracts system operating on Layer 2 and 3 of Bitcoin ecosystem.

Lightning Network: A Layer 2 payment protocol layered on top of Bitcoin.

Index Definitions

Index returns assume reinvestment of all income and do not reflect any management fees or brokerage expenses associated with fund returns. Returns for actual fund investors may differ from what is shown because of differences in timing, the amount invested and fees and expenses. You cannot invest directly in an index.

The S&P® 500 Index: is 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 Brent Crude Oil Spot Price Index is one of the major benchmarks used in pricing oil, alongside WTI Crude Oil Spot Price.

The MarketVector Bitcoin Benchmark Rate is designed to be a robust price for Bitcoin in USD, based on one hour median weighted prices.

All S&P indices listed are products of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright © 2023 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit S&P® is a registered trademark of S&P Global and Dow Jones®is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.

Risk Considerations

This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities, financial instruments or digital assets 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. 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. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this communication and are subject to change without notice. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its employees.

Hypothetical or model performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading, and accordingly, may have undercompensated or overcompensated for the impact, if any, of certain market factors such as market disruptions and lack of liquidity. In addition, hypothetical trading does not involve financial risk and no hypothetical trading record can completely account for the impact of financial risk in actual trading (for example, the ability to adhere to a particular trading program in spite of trading losses). Hypothetical or model performance is designed with benefit of hindsight.

Investments in digital assets and Web3 companies are highly speculative and involve a high degree of risk. These risks include, but are not limited to: the technology is new and many of its uses may be untested; intense competition; slow adoption rates and the potential for product obsolescence; volatility and limited liquidity, including but not limited to, inability to liquidate a position; loss or destruction of key(s) to access accounts or the blockchain; reliance on digital wallets; reliance on unregulated markets and exchanges; reliance on the internet; cybersecurity risks; and the lack of regulation and the potential for new laws and regulation that may be difficult to predict. Moreover, the extent to which Web3 companies or digital assets utilize blockchain technology may vary, and it is possible that even widespread adoption of blockchain technology may not result in a material increase in the value of such companies or digital assets.

Digital asset prices are highly volatile, and the value of digital assets, and Web3 companies, can rise or fall dramatically and quickly. If their value goes down, there’s no guarantee that it will rise again. As a result, there is a significant risk of loss of your entire principal investment.

Digital assets are not generally backed or supported by any government or central bank and are not covered by FDIC or SIPC insurance. Accounts at digital asset custodians and exchanges are not protected by SPIC and are not FDIC insured. Furthermore, markets and exchanges for digital assets are not regulated with the same controls or customer protections available in traditional equity, option, futures, or foreign exchange investing.

Digital assets include, but are not limited to, cryptocurrencies, tokens, NFTs, assets stored or created using blockchain technology, and other Web3products.

Web3 companies include but are not limited to, companies that involve the development, innovation, and/or utilization of blockchain, digital assets, or cryptotechnologies.

There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer duration fixed-income securities and during periods when prevailing interest rates are low or negative.

Emerging Market securities are subject to greater risks than U.S. domestic investments. These additional risks may include exchange rate fluctuations and exchange controls; less publicly available information; more volatile or less liquid securities markets; and the possibility of arbitrary action by foreign governments, or political, economic or social instability.

Gold investments are subject to the risks associated with concentrating its assets in the gold industry, which can be significantly affected by international economic, monetary, political developments and other risks specific to the gold industry. Foreign and emerging market gold security investments may entail heightened risks, such as adverse political and economic developments unique to a country or a region, currency fluctuations or controls, and the possibility of arbitrary action by foreign governments, or political, economic or social instability.

Hard assets investments are subject to risks associated with real estate, precious metals, natural resources and commodities and events related to these industries, foreign investments, illiquidity, credit, interest rate fluctuations, inflation, leverage, and non-diversification.

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.

© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.

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