BlackRock Suggests Investing Up to 2% in Bitcoin, Drawing Parallels with a Magnitude 7 Event
BlackRock Suggests Investing Up to 2% in Bitcoin, Drawing Parallels with a Magnitude 7 Event
With Bitcoin surpassing the $100,000 milestone, it seems like New York City-based heavyweight in asset management, BlackRock, is diving headfirst into the crypto world. In a recent publication titled "Assessing Bitcoin in Traditional Portfolios" by BlackRock Investment Institute, analysts propose that cryptocurrency, often shunned by conventional investors, should occupy 1% to 2% of traditional "60/40" investment portfolios.
This would place Bitcoin on par with companies such as Nvidia, Amazon, or Apple, despite its limited utility outside of speculative investment and absence of revenue generation from product sales like these major corporations. An estimated $5.2 trillion out of BlackRock's $11.5 trillion in managed assets consist of equities, which encompass ETFs like iShares Core S&P 500 ETF (IVV) with $576 billion in assets. Allocating merely 1% of BlackRock's equity assets to Bitcoin would translate to approximately $50 billion in fresh demand for the digital currency. Over the past 12 months, Bitcoin's price has seen an increase of over 130%, compared to a rise of 32% for the S&P 500.
In the research paper, the analysts, led by Samara Cohen, the Chief Investment Officer of ETF and Index products, suggest that Bitcoin's $2 trillion market cap shares similar risk to that of the "Magnificent 7" firms, whose average market cap is $2.5 trillion and accounts for around 35% of the S&P 500's $46 trillion market cap. Cohen emphasizes that these companies serve as a point of reference when evaluating the risk associated with a single holding. Bitcoin has a market cap of approximately $2 trillion.
The BlackRock report also highlights Bitcoin's historically low correlation to traditional markets. Cohen attributes this to how "all equity managers using a benchmark with the Magnificent 7 have this concentration risk, and they must consider what to do about it. Our proposal is to develop a framework to decide on an allocation that strikes the right balance, factoring in Bitcoin's extreme price volatility to maximize its potential as a diversifier while minimizing its impact on overall portfolio risk."
Although Bitcoin was formerly highly correlated to other asset classes, technology stocks, the report states that a divergence began in June 2023. Potential factors, including global financial system fragmentation, escalating geopolitical tensions, decreased confidence in banks, and ever-growing deficits, may contribute to this pattern continuing.
As Cohen explains, "2022 brought about a massive negative event, and given the high interest rates in 2023, a highly defensive investment strategy may be employed primarily by holding cash-like instruments in your portfolio. However, in 2024, the reality of reinvestment risk, lower interest rates, and requirement for a long-term asset allocation must be faced."
Cohen and her team discovered that a 1%-2% allocation in a 60/40 portfolio presents a risk level similar to that of a Magnificent 7 stock. Bitcoin's volatility, causing it to drop by as much as 70% in a year, makes a higher weighting unreasonable. A 1% weighting contributes 2% to the risk, while a 2% allocation escalates the risk weighting to 5%. A further doubling in the weighting to 4% accounts for an exponential 14% of the overall risk, as per the report.
Despite BlackRock recommending a maximum 2% allocation for investors looking to diversify with Bitcoin, it hints at future price increases becoming increasingly challenging. "The return characteristics will likely evolve significantly once we reach a target state where potentially the portfolio allocation is much more tactical, as with gold, and serves a hedging purpose with distinct characteristics," says Cohen.
Increased investor demand and escalating Bitcoin prices have already boosted BlackRock's business. In 2022, it collaborated with Coinbase to offer Bitcoin purchasing opportunities for institutional clients, and currently oversees the world's largest Bitcoin ETF, the iShares Bitcoin Trust (IBIT), boasting $50.8 billion in assets under management.
- BlackRock's recent publication suggests that cryptocurrency, including Bitcoin, should occupy 1% to 2% of traditional portfolios, positioning it alongside tech giants like Amazon and Apple.
- In the report, the analysts compare Bitcoin's $2 trillion market cap to that of the "Magnificent 7" firms, whose average market cap is $2.5 trillion, highlighting a similar risk profile.
- Google, being a major tech company, might be looking at Bitcoin and other cryptocurrencies as potential investments, given the growing interest and adoption in the digital currency market.
- BlackRock's collaboration with Coinbase in 2022, allowing institutional clients to purchase Bitcoin, indicates a shift in the traditional asset management industry's approach towards cryptocurrencies.
- Despite BlackRock recommending a maximum 2% allocation for investors looking to diversify with Bitcoin, the report hints at potential future price increases making it more challenging to manage risk levels.