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Bitcoin ETF Portfolio Allocation Expert View: How Much Should Investors Hold in BTC?

Last Updated January 12, 2024 10:22 AM
Giuseppe Ciccomascolo
Last Updated January 12, 2024 10:22 AM

Key Takeaways

  • Bitcoin ETFs are a good way to get exposure to Bitcoin without having to buy and store the cryptocurrency.
  • Investors should only allocate a small percentage of their portfolio to Bitcoin ETFs, according to experts.
  • Analysts suggest investors may gradually increase their holdings over time as they become more comfortable with this asset class.

With the introduction of bitcoin exchange-traded funds (ETFs) in 2021, investors now have a way to gain exposure to the cryptocurrency without having to buy and store it directly. However, the question remains: how much should investors allocate to BTC ETFs in their overall portfolios?

There is no one-size-fits-all answer to this question, as the appropriate allocation will vary depending on individual investor risk tolerance, investment goals, and time horizon. However, some experts shared their tips on how to add spot Bitcoin ETFs to your investment portfolio.

How Much Should Investors Hold In BTC?

The time-tested 60/40 portfolio model, known for its balance between equity growth and bond stability, has historically been a reliable choice for investors. However, emerging data suggests that portfolios incorporating Bitcoin can surpass the performance of their exclusively traditional counterparts. The following chart illustrates how the inclusion of Bitcoin in a conventional portfolio has bolstered returns from February 2012 to December 2023.

Source: Morningstar
Returns of a 60/40 portfolio

Tailoring VanEck’s approach  to align with investors’ risk tolerance and investment objectives, experts advocate for the incremental addition of Bitcoin, even in modest percentages such as 0.5%, 1%, and 3%. These seemingly small allocations possess the potential to reshape the dynamics of the conventional 60/40 portfolio significantly.

VanEck experts propose  that investors consider replacing a portion of their “Real Assets” allocation with Bitcoin. Noteworthy is Bitcoin’s finite supply of 21 million units and its fixed issuance schedule. This means the number of new bitcoins issued undergoes a halving approximately every four years. These characteristics underscore its role as a store of value assets, positioning it uniquely within the investment landscape.

Consensus among experts suggests that allocating no more than 5% of your portfolio to cryptocurrencies is a prudent strategy.

According  to Bruno Ramos de Sousa, Head of Global Expansion at Hashdex , this percentage is “small enough to keep an investor comfortable in periods of high volatility, but also large enough to have a truly positive impact on the portfolio if crypto prices rise.”

Some other experts, like Aaron Samsonoff, Chief Strategy Officer and Co-founder of InvestDEFY , permit  higher allocations of up to 20%. Ultimately, the ideal proportion of cryptocurrency in your portfolio depends on your risk tolerance and personal beliefs regarding the cryptocurrency market.

Pros And Cons Of ETFs

Although participation is optional, the recent wave of regulatory approvals has sent shockwaves through the market. It has promted many of them to consider it a potential game-changer for Bitcoin. Here’s a nuanced perspective from both sides of the debate, as analyzed  by the former Goldman Sachs equity research analyst and internet expert Carl Hazeley:

Reasons for Optimism:

  • Price Surge Potential: Historically, the introduction of major ETFs has propelled the value of assets, as seen with gold in 2006. The approval of bitcoin ETFs could similarly boost the cryptocurrency’s price trajectory.
  • Increased Accessibility and Affordability: The green light for ETFs makes Bitcoin more accessible and cost-effective. This may attract both retail crypto enthusiasts and significant institutional investors seeking an easier entry into the asset, drawn by lower fees and potential tax advantages associated with ETFs.
  • Growing Retail Investor Confidence: Current indicators reveal a surge in optimism among retail investors. According  to the Finimize Q1 2024 Modern Investor Pulse, 23% of retail investors plan to venture into the digital asset space in the next six to 12 months, a notable increase from the previous quarter’s 18%. This heightened optimism is complemented by a shift in sentiment, with 56% now anticipating a rise in bitcoin’s price over the next 12 months.

Reasons for Caution:

  • Potential Overestimation of Impact: Skeptics, including analysts at JPMorgan, argue that the perceived impact of these new ETFs may be exaggerated. They point out that bitcoin futures funds have not garnered significant investor attention since 2021, and they doubt that the marginal differences offered by spot bitcoin ETFs would substantially alter this trend.
  • Limited Real-World Use Cases: Despite the potential mainstreaming effect of ETF approval, the lack of widespread acceptance of crypto as a legal tender in everyday transactions remains a concern. While ETFs could elevate Bitcoin’s profile, the ultimate validation would be if cryptocurrencies were universally accepted at common outlets like Walmart and McDonald’s. Since ETFs currently hold no utility at point-of-sale, this transformative step may still be a considerable distance away.

Moody’s View

Ratings agency Moody’s said  the recent approval of spot Bitcoin ETFs significance could not be overstated. According to Rajeev Bamra, the senior vice president and head of digital finance at Moody’s Investors Service, this development holds the potential to simplify and secure bitcoin investments for a broader investor base. In effect, this institutionalizes the cryptocurrency and makes it accessible to a wider range of investors.

The approval of these ETFs could usher in a new era for Bitcoin. It will transform it into a more mainstream and transparent asset, according  to Moody’s. Bamra believes that this move could lead to a more stable and liquid cryptocurrency market. In turn, this could provide a reliable price discovery mechanism.

Bamra said: “The institutionalization of Bitcoin is poised to attract substantial inflows from institutions seeking entry into the cryptocurrency market.”

BTC ETFs approved
Spot Bitcoin ETFs approved

However, this step is not without its challenges and considerations. Bamra highlights the importance of global monetary policy and the need for Bitcoin products to meet regulatory and security standards.

Additionally, Moody’s Analytics Senior Director Yiannis Giokas cautions that, despite the potential benefits, traditional investors may face unfamiliar investment risks. This, he says, is due to bitcoin’s inherent price volatility and its fluctuating value compared to stablecoins and other cryptocurrencies.

In conclusion, the approval of spot ETFs on Bitcoin marks a pivotal moment in the cryptocurrency landscape. However, careful risk assessment and consideration of global economic factors will be crucial in navigating the markets evolving dynamics.

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