While bitcoin has demonstrated short-term fluctuations in tandem with equities and other risk assets, a new white paper by BlackRock suggests its fundamental drivers are “starkly different” over the long term, making it a “unique diversifier”.
“We believe that bitcoin, via its nature as a global, decentralised, fixed-supply, non-sovereign asset, has risk and return drivers that are distinct from traditional asset classes, and that are fundamentally uncorrelated on any long-term basis,” it said.
“We maintain this conviction even as short-term market trading behaviour occasionally diverges (in some cases profoundly) from what bitcoin’s fundamental characteristics would suggest.”
Notably, the cryptocurrency was not immune to the significant market sell-off last month, having recorded a one-day drop of 7 per cent against a 3 per cent decline in the S&P 500 on 5 August.
This episode, BlackRock observed, coincided with a series of bitcoin-specific events that had already been unfolding over the preceding days.
Despite this volatility, the asset manager observed bitcoin’s long-term correlation to equities and bonds has been low, and its long-term historical returns have been “vastly higher” than all major asset classes.
“While there have been brief periods where bitcoin has seen its correlation spike – particularly round episodes of sudden shifts in US dollar real interest rates or liquidity – these episodes have been short term in nature and have failed to produce a clear long-term statistically significant correlation relationship,” the asset manager said.
BlackRock highlighted that bitcoin, despite being the worst-performing asset in three of the last 10 years and experiencing four drawdowns exceeding 50 per cent, has outperformed all major asset classes in seven of those years, achieving an impressive, annualised return of over 100 per cent.
Looking at its performance through major geopolitical events, BlackRock revealed the asset plunged 25 per cent in the 10 days following the COVID-19 outbreak on 11 March but rebounded to return 21 per cent over the next 60 days.
In contrast, over the same time period, the S&P 500 and gold fell 20 per cent and 9 per cent, respectively, and climbed to gains of 2 per cent and 3 per cent in the next 60 days.
More recently, the analysis found that bitcoin also exhibited resilience after the Russian invasion of Ukraine on 24 February 2022, initially dropping 6 per cent in the 10 days following the event but rebounding to deliver a 15 per cent return by May.
“In most instances … bitcoin has recovered back to its prior level within days or weeks, and in many cases, has rallied further,” it said.
However, BlackRock warned that bitcoin is “still very much a risky asset” and remains an “emerging technology”.
“Bitcoin has also been volatile and subject to myriad risks that include regulatory challenges, uncertainty over the path of adoption, and a still-immature ecosystem,” it said.
“The key point, however, is that these risks are unique to bitcoin and not specifically shared by other traditional investments assets.”
BlackRock emphasised that bitcoin serves as a noteworthy case study illustrating the limitations of risk-on and risk-off asset frameworks, noting that while modest allocations of bitcoin can diversify portfolios, larger positions may increase overall portfolio risk due to its elevated volatility.
Earlier this year, BlackRock CEO Larry Fink, described himself as a “true believer” in the cryptocurrency, throwing his support behind bitcoin in an interview with CNBC.
Since the start of the year, the firm’s iShares Bitcoin Trust ETF, listed on the NYSE Arca following US SEC approval of bitcoin ETFs in January, has seen significant inflows. It now boasts over $22 billion in net assets.
