Bitcoin has been around since 2007, went mainstream around 2017 and experienced an all-time high in November 2021. A month prior to its all-time high, bitcoin started trending higher, as values exceeded $65,000, driven in part by the launch of the ProShares Bitcoin ETF, the first bitcoin futures exchange-traded fund (ETF) approved by the U.S. Securities and Exchange Commission (SEC). Then, in 2022, cryptocurrencies fell by more than 60% due to fraud, regulatory barriers and rising interest rates. The market continues to fluctuate, with bitcoin prices reaching roughly $23,600 as of early March 2023 after another crypto exchange, FTX, filed for bankruptcy.

For the cryptocurrency market, the futures-based ETF was a milestone that transformed how bitcoin and other crypto assets are traded. There are other bitcoin futures ETFs in the market that have begun trading following ProShares Bitcoin ETF’s emergence, and others are waiting for the final nod from the SEC to begin trading. However, there is still skepticism since the ETF invests in futures instead of directly in bitcoin, and thus may not perfectly replicate the performance of the targeted cryptocurrency.

Bitcoin as an Investment

Bitcoin and other cryptocurrencies can be alluring for those investors willing to assume substantial risk and driven by the belief that crypto is a viable store of value. Glenmede considers two main questions when evaluating bitcoin’s prospects as an investment from a diversified portfolio perspective:

• Is bitcoin a good alternative store of value?
• Is bitcoin a good structural addition to an overall portfolio?

As a Store of Value

Good stores of value traditionally offer stability, but bitcoin has exhibited a tremendous amount of volatility. Exhibit 1 shows the number of trading days since October 2013 that each asset class has moved in either direction, up or down, greater than the stated threshold. For example, stocks saw daily moves of more than 5% eleven times, bonds never did so, gold did so only once and bitcoin did so 520 times.

This volatility is somewhat expected due to the developing status of the cryptocurrency asset class, so some have argued that bitcoin’s volatility should settle down once it becomes more widely accepted, but so far that is not the case. Exhibit 2 shows rolling one-year annualized volatility as measured by the annualized standard deviation of 12-month returns. Bitcoin’s volatility throughout time has had its ups and downs, but it has remained more volatile than bonds, gold and even U.S. large cap stocks. Even at its lows, 45% volatility can be difficult to stomach, particularly if bitcoin is meant to provide a longer-term store of value.

As a Structural Addition to a Portfolio

Bitcoin does not necessarily have to be a good store of value to be additive to a portfolio. In general, any asset that provides positive expected returns and low correlation to other assets can potentially be an attractive investment by providing a degree of diversification. More valuable diversifiers, such as bonds and gold, tend to exhibit their noncorrelation when stock markets decline. Exhibit 3 shows the correlation of bonds, gold and bitcoin to stocks under two scenarios — all days since 2018 and all days since 2018 when stocks were down more than 1%. In both scenarios, bitcoin has exhibited higher correlations than both bonds and gold, particularly in risk-off environments. The same can be seen with the equity beta, which represents the amount of stock market risk embedded in each asset class.

Exhibit 4 shows the returns for the same four asset classes during the last three risk-off events in domestic large cap equity markets, with the Christmas Eve correction on the left, the COVID-19 bear market in the middle and the ongoing Federal Reserve tightening cycle on the right. In some of the timeframes shown, the S&P 500 was down close to or more than 20%, but traditional diversifiers exhibited much lower volatility. The same cannot be said for bitcoin, which was down almost as much as stocks during the bear market in 2020 and more than twice as much in 2018 and most recently.

Conclusion

Although an ETF option may provide investors greater accessibility, bitcoin has an empirical track record of unrivaled volatility and has failed to offer downside protection — poor attributes for a store of value. While bitcoin appears disadvantaged relative to other traditional stores of value and investment assets, the advent of the underlying blockchain technology may create new investment opportunities. Blockchain-based technology is rapidly evolving, and there may be some interesting applications for it, such as decentralized finance and digital rights ownership, with some private market opportunities beginning to emerge.