BlackRock: Bitcoin is a unique diversification asset

The asset management giant BlackRock has released a whitepaper on Bitcoin, explaining Bitcoin as an independent risk asset with characteristics unrelated to most macroeconomic conditions. Although still in its early stages of adoption, Bitcoin may become an increasingly unique diversification tool for investors, helping to hedge against some financial, currency, and geopolitical risks that investors may face in their portfolios.

Bitcoin's Return Rate Reaches 800,000 Times Since Its Launch in 2010

Over the past 10 years, Bitcoin has outperformed all major asset classes for 7 years, resulting in extraordinary annualized returns of over 100% over the past decade. Despite being one of the worst-performing assets for three years in this decade, Bitcoin has experienced more than 4 drops of over 50%. Through these historical cycles, it has demonstrated the ability to recover from these setbacks and reach new highs, even though bear markets have been prolonged.

Bitcoin Has Extremely Low Correlation with Other Assets

Bitcoin is minimally influenced by other macro variables, which explains its lower long-term average correlation with stocks and other "risky assets." BlackRock has analyzed the six-month trailing correlations between the U.S. stock market represented by the S&P 500 Index and Bitcoin as well as gold since 2015, finding that the average correlation coefficient between Bitcoin and the S&P 500 Index is only 0.2%, and sometimes even negative.

Although at times Bitcoin's correlation spikes in the short term, especially around sudden changes in U.S. real interest rates or liquidity, these events are essentially short-term and do not yield clear long-term statistically significant correlations.

Bitcoin's Performance in Major Geopolitical Events

As the first widely adopted decentralized, non-sovereign alternative currency globally, Bitcoin has no traditional counterparty risk, does not depend on any central system, and is not driven by the fate of any single country. These attributes largely disconnect it fundamentally from certain key macro risks, including banking system crises, sovereign debt crises, currency devaluations, geopolitical turmoil, and other country-specific political and economic risks. Over the long term, Bitcoin's adoption trajectory may depend on fluctuations in concerns about global currency instability, geopolitical disharmony, U.S. fiscal sustainability, and U.S. political stability.

Due to these attributes, in the past five years, some investors have seen Bitcoin as a "safe haven" during periods of fear. It is noteworthy that in some of these cases, Bitcoin has exhibited a brief negative response before rebounding. In most cases, including the global market sell-off on August 5, 2024, Bitcoin has recovered to previous levels within days or weeks, and in many cases, as people begin to recognize the potential positive impact of such disruptive events on Bitcoin's fundamentals, the price of Bitcoin further rises.

Bitcoin Remains a Risky Asset, But Can Be Viewed as a Unique Diversification Tool

Nevertheless, BlackRock still believes that Bitcoin remains a highly risky asset on a standalone basis. Bitcoin is an emerging technology and is still in its early stages of adoption, with the potential to become a global payment asset and store of value. However, it also faces numerous risks, including regulatory challenges, uncertainty in adoption paths, and an immature ecosystem.

But as the global investment community grapples with increasingly heightened geopolitical tensions, concerns over U.S. debt and deficits, and escalating global political instability, Bitcoin may be seen as an increasingly unique diversification tool that can help hedge against some fiscal, monetary, and geopolitical risks that investors may face in other positions in their portfolios. From a portfolio perspective, this is why holding Bitcoin in a moderately allocated manner can have a diversifying impact on the portfolio.