Bloomberg Column: BTC is earning a place in balancing portfolios

Source: Bloomberg

By Aaron Brown

Compilation: BitpushNews Yanan

This rally proves that even crypto-skeptical investors should recognize that it would be safer to allocate a small amount of BTC to their portfolios than to ignore the asset altogether.

This week’s BTC sold for more than $44,000, more than double the price on March 13. According to market analysis, BTC price performance is not very surprising. Back in 2014, BTC doubled every nine months and 21 days on average, but this time, it did so 28 days ahead of schedule.

However, it is somewhat surprising that in the course of this doubling, BTC did not fall below the lowest point of March 13. Typically, the average drop in BTC between each doubling is 27% (e.g., from $1,000 to $730 and then above $2,000), with a maximum drawdown of 83% (i.e., the price falls to $170 and then to $2,000).

Nonetheless, BTC rollercoaster of price volatility is a thing of the past. Since the peak of volatility during the pandemic, BTC has stabilized at around 50% annualized volatility, which is on par with many big tech stocks. What’s more, against the backdrop of numerous scandals, bankruptcies, legal prosecutions, and regulatory controversies in the cryptocurrency space, BTC still shows relatively stable prices.

Does this mean that at this year’s festive dinner, BTC can get in the hall and have their place in the standard portfolio?

For most investors, the answer is still “no”. BTC has enough appreciation potential to attract investors, and volatility no longer seems to be a daunting factor. Issues such as the security of asset custody, tax treatment, and legality seem to have been largely resolved. But the BTC’s unstable correlation with other major assets – particularly equities, currencies and gold – makes it difficult to fit into a portfolio, like a left-handed dinner guest.

Back in 2011, I estimated that cryptocurrencies would account for 3% of the global economy. As an efficiency market investor, I always invest 3% of my net worth in cryptocurrencies, regardless of market volatility or spikes or crashes in crypto prices. However, most investors prefer investment classes where fundamental events are predictive and tend to hold for the long term rather than engage in short-term operations frequently. (Disclosure: The author of this article has a venture capital and advisory relationship with the cryptocurrency company.) ）

BTC originally existed as a trading currency, which was also its original value proposition. BTC is far more efficient than the traditional financial system in handling international transfers and serving the unbanked and oppressed by the financial system.

In addition, BTC facilitate criminal activities that are rarely prosecuted, such as recreational drug sales, prostitution and gambling. Although there is a widespread misconception that BTC are often used for vicious criminal activities, such as terrorism or homicide for hire, this is not the case, as BTC trading activities are open and immutable. Admittedly, BTC transactions are anonymous activities, but investigators are often able to easily trace individuals through analysis of transaction patterns. For vicious criminals, it’s common to disguise their identities with government-issued assets such as cash, gold, or BCD, or privacy-preserving cryptocurrencies like Monero or ZCash.

At a Senate Banking Committee hearing this week, Senator Elizabeth Warren agreed with JPMorgan Chase CEO Jamie Dimon and other bankers that anti-money laundering controls should be implemented on cryptocurrencies. While laws can make it difficult to deposit and withdraw fiat currencies linked to criminal activity, there is no way to prevent or trace direct transfers between cryptocurrencies that are privacy-preserving in nature. And the system of financial repression that fights money laundering is one of the things that motivates people, both good and bad, to use cryptocurrencies.

And this doesn’t matter to BTC, because its use case and value proposition as a transaction currency has long since collapsed. The fundamental improvement of traditional finance and the government’s regulation and crackdown on the use of cryptocurrencies for criminal activities are all factors that have caused BTC to no longer be positioned as a trading and transfer tool. But in addition, the biggest reason for the collapse of the trading currency attributes that BTC initially assumed was the emergence of innovative cryptocurrencies like Ripple or Nano - which performed far better than BTC as a transaction currency.

Around 2015, the value proposition of BTC changed from “trading currency” to “digital gold”. BTC will be the value anchor of cryptocurrencies for the conversion of traditional currencies into and out of cryptocurrencies – just as gold has been the value anchor of paper money for centuries, used to settle accounts between central banks.

From this perspective, the value of the BTC depends on three factors: the ultimate value of the crypto project, the amount of traditional money in and out of the cryptocurrency, and whether the financial services of the crypto economy (i.e., an alternative to the traditional banking system) are superior.

The first factor, the ultimate value of a crypto project, is basically a technology venture - on the one hand, many exciting ideas can change the world and be worth trillions, but on the other hand, the actual revenue or profit of these projects is very small in traditional currency.

The amount of traditional money moving in and out of cryptocurrencies has been affected by economic booms and downs, or in crypto terms, summer and winter. During the crypto summer, there is a lot of money flowing in, but there are also a lot of crypto people who will cash out some of their gains during this period. In addition, people use BTC to switch from one crypto project to another. And during the crypto winter, there is very little money flow in both directions, so there is little demand for BTC financial services in the industry.

The most stable element lies in competition in the financial services sector. BTC quickly strengthened its ties to trading open futures and options, efficient lending, safe custody, and other aspects of the modern financial system. If, as the market expects, the SEC approves the BTC of ETFs in January, the entire BTC financial services system will be further improved. People can invest, finance, hedge, speculate, exchange and hold on BTC similar to stocks and bonds, and BTC ensure that these operations are efficient. In addition, the BTC also provides a convenient channel for people to quickly enter the entire cryptoeconomic system.

In contrast, stablecoins have only been successful in specific areas. Among other cryptocurrencies, only ETH Fang has developed a native financial system, but it is still far behind BTC. Traditional financial institutions have tried to leverage blockchain and other crypto technologies, again only succeeding in specific areas, but this has not posed a threat to BTC’s dominance. In addition, some companies that tried to integrate financial services directly into the cryptocurrency system, such as FTX and Celsius Network, crashed and crashed in 2022, and these events also had a negative impact on similar enterprises.

And this three-step value proposition also explains the volatile correlation of BTC with other traditional financial assets.

The market value of crypto projects depends on investors’ enthusiasm for technology startups, which has a high correlation with tech stocks. But investors’ enthusiasm for putting their money into cryptocurrencies is often the opposite of tech stocks – disappointing tech stock returns have led optimists and risk enthusiasts to turn to crypto.

The latest doubling of BTC price seems to be largely related to growing regulatory clarity and tolerance, but this does not seem to apply to stablecoins or other cryptocurrencies. This not only increases the efficiency of the BTC financial system, but also makes it safe from competitors. Typically, there is no clear correlation between regulatory attitudes and asset prices.

In the current situation, there do not seem to be specific factors that will affect the success of crypto projects or people’s enthusiasm for crypto trading, so the near-term market outlook for BTC seems to rely heavily on regulatory developments, particularly BTC the approval of spot ETFs. In addition, there is always the possibility of a market pullback or a black swan, especially when a new crypto scandal emerges.

There is almost zero competition from stablecoins, traditional finance, and native crypto institutions, so any progress in these areas will only have a negative impact on BTC. My guess is that the next doubling of the price of BTC will likely be driven by the long-awaited “killer app” in the crypto space, which will attract millions of people to learn and use crypto instead of just holding or trading it. Another possibility is that there are problems in the traditional financial system – such as crises, tighter regulations, inflation concerns, credit crunching, etc. – that could make BTC relatively more attractive.

We are gradually coming to a consensus that even traditional investors who are conservative about cryptocurrencies should recognize that it would be safer to allocate a small amount of BTC to their portfolios than to ignore the asset altogether. While cryptocurrencies are still at risk of going to zero, their potential for growth is enough to make portfolios insulated in this space appear unbalanced.