This week, we are at Consensus, and today is FA day – please say hi if you are around!
Last week was a big week in the U.S. regarding regulatory movement; the House of Representatives voted in favour of a new crypto bill, and the SEC made an approval that moved the spot ether ETF listings forward.
In today’s newsletter, Benjamin Dean from Wisdom Tree examines bitcoin’s evolution since its inception, its performance as an asset, and its integration into traditional finance.
In Ask an Expert, Kevin Tam from Raymond James provides an overview of the SEC 13F filings and what they show us about which institutions have invested in bitcoin ETFs.
And as always, there’s more information in the Keep Reading section.
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It has been 15 years since the Bitcoin source code was distributed online. The idea was to provide a way for people to exchange value without an intermediary having to approve said exchange. A lot has changed over the past 15 years as many other distributed database networks have been created (e.g., Ethereum, Solana, etc.). Each brings its own functionality and potential use cases.
Our research reveals several interesting points that have remained surprisingly constant over the years – even though one typically thinks of digital assets as a fast-moving and ever-changing space:
Bitcoin outperformed large-cap and small-cap equities, treasury, investment-grade, and high-yield bonds, as well as gold, REITS, or infrastructure, in nine out of the last twelve years.
The correlation of bitcoin, calculated over the last 11 or 2 years, with all the asset classes above was lower than 25%.
The asset’s volatility is 69%, but thanks to its low correlation, adding 1% of it to a 60/40 portfolio (60% MSCI All Country World, 40% Bloomberg Multiverse) would have added only 0.07% of volatility and 0.5% of max drawdown.
This 1% position would have improved returns over the last 11 years by 0.67% per year, which is an information ratio of 0.96.
Similar statistical findings apply to digital assets as a whole (i.e. beyond bitcoin). The implication for investors is that they do not need to take an active view on the asset; they can allocate as a neutral investor. A good assessment of the neutral positioning of an asset in a multi-asset portfolio is to look at the market portfolio, i.e. the portfolio that simulates the totality of all liquid assets accessible to investors.
The total market cap of liquid assets is around $197 trillion. With a market Cap of $2.4 trillion, cryptocurrencies represent almost 1.2% of that. This market is now similar in size to high-yield bonds, inflation-linked bonds, or emerging markets small caps.
Looking purely at the characteristics of cryptocurrencies and digital assets, it is clear that they can bring value to a multi-asset portfolio. With their growth potential, diversification credentials and ease of investment through regulated investment vehicles, it is becoming increasingly hard for investors to ignore them. With a 1-2% investment, investors would be taking a neutral stance on the space, ready to benefit from potential upside and manage the risk by limiting the downside risk to a single percent.
It is now easier than ever to do this. 2024 has seen the launch of many global bitcoin and other digital asset exchange-traded funds (ETFs). The spot bitcoin ETFs in the U.S. have seen some of the largest inflows of any ETF launch in history. Spot ether products are likely the next step. Hong Kong has approved the listing of exchange-traded funds that provide exposure to bitcoin and ether. The London Stock Exchange is doing the same thing, though initially for professional investors.
Some might become wistful to watch the digital asset space merge with traditional finance. However, this is a normal part of a new industry growing and maturing. Sure – we end up with an ironic outcome: for this new asset class, one of the safest/most accessible/most transparent ways to gain exposure is via ETF/ETP. At the same time, with the statistical evidence now established and the investment case for allocation difficult to ignore, expect to see digital assets increasingly resembling the traditional financial system that this novel technology was built to improve upon.
Q: What do the SEC 13-F filings tell us about bitcoin or ETF adoption?
A 13F is a report of stock holdings filed by an institutional investment manager with assets over $100 million. Canada’s five largest banks, TD Bank, RBC, BMO, CIBC and Scotiabank, have added an allocation of bitcoin ETF to their institutional holdings. The total exposure from the Canadian banks is over $19.9 million.
Q: Why do these ETFs matter, what does this mean?
The U.S. Securities and Exchange Commission approved the spot bitcoin ETF for listing and trading in January 2024, which has attracted more participants and further enhanced liquidity in the crypto market.
Institutional and retail investors can now purchase securities representing direct exposure to the spot bitcoin market without self-custody of bitcoin.
The spot bitcoin ETFs are backed by bitcoin holdings held at regulated custodians. This arrangement relieves individual investors of the responsibility of sourcing a custodian themselves or managing self-custody, which could expose them to risks such as hacking or loss of custodian keys due to inadequate technology security measures.
Q: Owning bitcoin is risky, so why is the bank integrating this?
We are seeing the adoption of bitcoin as a legitimate asset class with large institutional investors purchasing bitcoin as an alternative investment, looking for ways to diversify their portfolio and seek returns that hedge against market volatility, all within an approved regulatory framework.
The U.S. Securities and Exchange Commission approved applications from several exchanges to list exchange-traded funds (ETFs) tied to the price of ether.
According to SEC filings, Blackrock’s spot bitcoin ETF attracted 414 institutional investors in Q1 of 2024.
Morningstar summarized the U.S. House of Republic crypto vote and why it’s a massive step forward for the industry.
Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.
