Author: Blackrock

As one of the world's largest asset management companies, BlackRock's attitude towards BTC and other crypto assets has become more positive. From actively applying to promote BTC Spot ETF at the beginning of the year to occupying a leading position in BTC Spot ETF share, its recognition of the cryptocurrency market is self-evident. Yesterday, it also released a 9-page White Paper, which elaborated on the unique position of BTC as the main crypto asset and explained its unique value and significance worldwide. The following is the simplified version:

Is BTC a 'risky asset' or a 'safe haven asset'? This is one of the most frequently asked questions by users when they first invest in BTC. We believe that the unique nature of BTC makes it unsuitable to be evaluated within the TradFi framework, and its long-term return drivers are fundamentally unrelated to the return sources of other investment portfolios. Despite the volatility of Bitcoin (BTC) and its occasional correlation with the stock market in the short term (especially during significant changes in actual interest rate or liquidity of the US dollar), BTC has a low long-term correlation with stocks and bonds, and its long-term historical returns are significantly higher than all major asset classes. In the long run, we believe that the adoption drivers for Bitcoin may differ significantly from the global macro factors affecting most TradFi assets, and may even be the opposite in some aspects. This article will elaborate on this in detail.

Why is Bitcoin important?

First of all, we need to fundamentally understand what gives BTC its importance. Since its birth in 2009, BTC has become the first internet-native currency tool widely adopted globally. Its technological innovation has created a digital native, global, scarce, decentralized, and permissionless form of currency. It is these attributes, these characteristics that have propelled BTC to breakthroughs in the field of currency, solving long-standing problems that have plagued currency throughout history: 1. BTC sets the supply limit to 21 million coins through hard coding, which means it will not depreciate easily. 2. Its globalization and digital native nature means that it can be transmitted almost in real time and almost at zero cost globally, breaking down the inherent barriers to transferring value across political borders. 3. Its Decentralization and permissionless nature make it the world's first truly open-access monetary system.

Despite the emergence of other encryption assets since Bitcoin (BTC) broke through, and the pursuit of broader applications in many cases, only the head encryption asset BTC has achieved global consensus worldwide. It is this point that makes BTC unique in the field of encryption assets, becoming a global currency substitute and an asset with credible scarcity.

The Path to Bitcoin's $1 Trillion Market Cap

Despite the significant rise of Bitcoin (BTC) to date and its widespread adoption globally, the uncertainty remains as to whether it will ultimately develop into a widely recognized store of value or a global payment asset, with its ever-changing market value reflecting this uncertainty. In the past 10 years, BTC has outperformed all major asset classes for 7 years with an annualized return of over 100%. However, BTC has been the worst-performing asset in the other 3 years, experiencing four major pullbacks of over 50%. Nevertheless, after enduring these historical cycles, BTC has demonstrated the ability to recover from significant pullbacks and reach new highs, despite these cycles often being accompanied by long periods of Bear Market. The Fluctuation of the BTC price partly reflects its prospects as a global currency substitute over time.

The data shows the PA of BTC from July 19, 2010 to July 31, 2024, with the start date marking the launch of the first BTC exchange, Mt. Gox. Source: Bloomberg Bitcoin Spot price, as of July 31, 2024.

Assets Unrelated to Macroeconomic Variables

The basic correlation between BTC and other macro variables is relatively low, which also explains why its long-term average correlation with stocks and other "risk assets" is low. Although in some short periods of time, the correlation of BTC has risen - especially when the actual interest rates or liquidity of the US dollar suddenly change - these situations are short-term phenomena and have not formed a clear long-term statistically significant correlation relationship.

1. BTC has historically had a low correlation with US stocks and has gone through several periods of decoupling

From the above figure, it can be seen:
**A, The 6-month lag correlation of the weekly return rates of BTC and gold with the S&P 500 index, covering the period from January 1, 2015, to July 31, 2024. Source: Bloomberg BTCSpot price, Bloomberg gold Spot price, Standard & Poor's Global and BlackRock calculations, as of July 31, 2024. The average 6-month lag correlation between B, BTC and gold weekly returns and the S&P 500 index, covering the period from January 1, 2015 to July 31, 2024. As the first Bitcoin, a decentralized, non-sovereign substitute for currency, it has no traditional counterparty risk, does not rely on any centralized system, and is not driven by the economic conditions of any single country. These characteristics fundamentally decouple it from certain key macroeconomic risk factors (such as banking system crises, sovereign debt crises, currency devaluation, geopolitical turmoil, and other country-specific political and economic risks) in a general sense. **In the long term, the adoption path of BTC may be driven by concerns about the degree of Fluctuation in global currency instability, geopolitical disharmony, US fiscal sustainability, and US political stability. Due to these attributes, BTC is considered by some investors as a 'safe haven asset' during times of panic, especially in some of the most disruptive global events in the past five years. It is worth noting that in these events, BTC initially showed brief negative reactions, followed by a recovery. In our view, these short-term trading reactions are often difficult to explain based on fundamentals and may be attributed to several factors: As an asset that trades around the clock and settles almost instantly, BTC shows high sellability in traditional markets, especially during weekends when liquidity is tight. The B, BTC, and encryption asset markets are still relatively immature, and investors' understanding of BTC is also evolving. ** In most cases, including the global market dumping on August 5, 2024, BTC rebounds to previous levels within a few days or weeks, and in many cases further pumps, as the market begins to recognize the positive potential impact of these disruptive events on the BTC fundamentals.

2. Performance of S&P 500, gold, and BTC in major geopolitical events

3. The dynamic of US debt has once again attracted follow

In this context, concerns about the US federal deficit and debt situation, both in the US and globally, have increased interest in Bitcoin as a potential alternative reserve asset, hedging against potential future events that may affect the US dollar. This trend also seems to be evident in other heavily indebted countries. Based on our market experience, this explains one of the important reasons for the recent widespread increase in institutional interest in Bitcoin.

Yellow section: Total US federal debt/trillion dollars Red line: the percentage of US deficit (-)/surplus (+) as a share of GDP

BTC is still a high-risk asset

Despite previous analysis showing some characteristics of BTC, this does not change the fact that BTC still has a high level of risk as an independent asset. As an emerging technology, BTC is still in the early stages of widespread use, and it is uncertain whether it will become a global payment asset or a store of value tool in the future. In addition, BTC has also experienced significant fluctuation and faces various risks such as regulatory challenges, uncertainty in the path to widespread adoption, and an immature ecosystem. However, the key is that these risks are unique to Bitcoin, rather than being generally present in traditional investment assets. Therefore, the simple framework of 'risk preference' and 'risk aversion' may not be applicable to BTC. From the perspective of the investment portfolio, this is why BTC can play a diversified role when moderately allocated, while the high volatility will significantly increase the risk of the investment portfolio when the holdings are large.

Summary

Although BTC has been correlated with stocks and other 'risk assets' in the short term, its fundamental drivers are significantly different from most traditional investment assets in the long term, and in many cases, even the opposite. As the global investment community faces increasingly intense geopolitical tensions, concerns about US debt and deficits, and political instability around the world, Bitcoin may be seen as a unique asset that can hedge against some of the financial, monetary, and geopolitical risks that other assets in an investment portfolio may face.

Original Title: Bitcoin: A Unique Diversifier Original article link: Original authors: Samara Cohen, Robert Mitchnick, Russell Brownback, Blackrock Compilation: Plain Language Blockchain