Bitcoin: An Asset Allocator Primer

Published on: January 28th, 2021

Bitcoin recently celebrated its twelfth birthday, but in historical terms, it is still very much in its infancy as compared to other major asset classes. In this paper, Joel Coverdale, CFA, of Eight Isle will outline how to think about bitcoin in the context of institutional money management, and specifically, in the context of the risk management process. He and his colleagues will posit that many of the characteristics of bitcoin are much like other assets, that it should not be treated that differently, and that from an asset allocation perspective, it provides some appealing benefits for a globally diversified investment strategy. The institutionalisation of bitcoin is gaining pace. This paper aims to add structure to that process and identify some key themes for those interested to begin allocating.

Comments

  • AB
    Amarildo B.
    25 February 2021 @ 10:54
    Bitcoin 🌷🌷 biggest Pyramid Scheme on the Planet 🌍.
  • ag
    alexandre g.
    1 February 2021 @ 20:07
    Interesting article thanks! One question, if Bitcoin is akin to gold how do you explain the correlation between Bitcoin and gold in table 1 page 13 to be at the lowest (0.03) amongst all other assets. As hard money, one would expect common factors to drive gold and bitcoin such as fiat money supply for instance and thus one would expect some higher correlation between gold and bitcoin?
    • JC
      Joel C.
      2 February 2021 @ 02:58
      let me address that question with a couple of comments: The data itself doesn't lie > it is what it is... so if that's the case, we can make some assumptions about what's going on; either - the correlation isn't stable, so whilst the point-in-time correlation is 0.03, please keep in mind that's just an estimate based on the prior 2 years worth of data; it does move about quite a bit (but referring to the graph on page 13 actually you can see the correlation through time has actually been pretty close to zero for most of the time); or - whilst the 'story' of bitcoin and gold is a good one from a hard-money aspect etc, maybe the data is actually telling us that whilst it may be true, perhaps bitcoin has yet to actually take that role, and therefore doesn't behave in a similar fashion to gold (yet)... It's all about interpretation, so there's no right answer here. I would be inclined to think its more of the latter... that is bitcoin is still emerging. Many people still see if fulfilling different roles, for some it's about hard money, but for others its still about speculation and return only. Either way, the important point is it's low correlation across a range of assets... implying that it does fulfil a different function that can be beneficial in the portfolio context.
    • ag
      alexandre g.
      2 February 2021 @ 06:43
      Thanks Joel, I would go for the latter too.
  • DM
    David M.
    1 February 2021 @ 16:48
    Good paper and super helpful. More like this please RV!
  • OL
    Otto L.
    31 January 2021 @ 17:51
    Great perspective and analysis, thanks. Would be good for Joel and Mark Yusko to discuss on RV. #GetOffZero
  • NR
    Niels R.
    31 January 2021 @ 15:20
    Interesting article as a 101. Thank you for providing Joel, Raoul and the other members.
  • MJ
    Marius J.
    31 January 2021 @ 12:05
    Thanks for papers like this! Super useful to get more.
  • JG
    Jonnie G.
    31 January 2021 @ 11:11
    Thanks for this. Once again, love reading these papers.
  • JR
    Jake R.
    30 January 2021 @ 23:04
    Thanks for this guys! The risk model part was very interesting. Showing an asset allocator that BTC has the Risk profile of a small cap, but is completely uncorrelated.
  • SD
    Sarah D.
    30 January 2021 @ 20:49
    Thanks Joel and the team, as always timely content in plainspeak with enough technical content to keep me actively learning. Putting this into perspective with Plan B's STF2 model has deepened my understanding of how to invest in BTC. Great work.
  • DF
    David F.
    30 January 2021 @ 16:01
    Wonderful. Did the FCA get given a link? Thank you once more.
  • RL
    R L.
    30 January 2021 @ 00:00
    @raoul, Dalio just put out a piece on Bitcoin and crypto. it would be super helpful for us normies to understand what he is saying in his note and how your thesis differs.
  • fa
    francisco a.
    29 January 2021 @ 22:09
    Thank you. Great work.
  • RM
    Ricardo M.
    29 January 2021 @ 20:44
    Well done, I really enjoyed to read this. I learned a lot!
  • AK
    Abdel K.
    29 January 2021 @ 00:02
    NiceπŸ™‚
    • AK
      Abdel K.
      29 January 2021 @ 16:43
      Great content πŸ‘Œ team Real Vision πŸ‘πŸΌ
  • AA
    Andrew A.
    29 January 2021 @ 10:43
    I think this is a very important paper. I hope its circulated at Michael Saylor's upcoming Bitcoin Summit - https://www.microstrategy.com/en/resources/events/world-2021/bitcoin-summit
  • JB
    James B.
    29 January 2021 @ 10:02
    Well done on your white piper. Glad to see the excess Sharpe calculations. I’d love to know whether it remains superior on a sortino basis too.
  • RH
    Richard H.
    29 January 2021 @ 10:01
    Cool paper! I feel the 5% bitcoin diagram was to conservative. I would go 15-20 on a bare case haha. Anyways great job.
  • AI
    Andras I.
    29 January 2021 @ 03:09
    Apologies to all maximalists up front! Maybe I'm just triggered by the hype email that brought me here (and obviously I'm as ignorant as always): "This white paper is of _critical_importance_ for pension funds, endowments, insurance companies, and asset allocators of all types. And while it is targeted at those institutional players and their clients, we think it is relevant for all in the crypto and broader investing communities." It's a lovely piece of writing but little more than an executive review of the metric ton of free papers (and I imagine even larger quantities of even more detailed pitch material submitted to said institutions) from Grayscale, Galaxy, Pantera, Ark Invest, Kraken...etc. that were made available during 2020. I would hope institutions have the capacity (and willingness) to read broader research and hopefully can easily run this data internally! So...is this paper aimed at the institutions or us retailers to further the fading "the institutions are coming!" narrative? Nevermind...just a thought.
    • JC
      Joel C.
      29 January 2021 @ 07:12
      thanks for the comments > as the author, what I would say is twofold; 1) don't assume that institutions have embraced this yet - yes they absolutely can/could run this type of analysis internally, but whether they are is another matter; more often what they need is an 'independent' take; 2) the genesis of writing it was really to help anyone understand a few simple truths about how bitcoin behaves in a broader investment framework. Whether a retail investor, or an institutional asset allocator, hopefully there is something in there that can add value and educate. I can honestly say there is no 'agenda' behind the piece.
  • AA
    ALLEN A.
    29 January 2021 @ 06:36
    So I've never actually read thru a paper of this type, but I love that it was super easy to understand, and for me illustrated that there is so much more to learn on risk, portfolio construction, and correlation.
  • TM
    Tim M.
    29 January 2021 @ 06:30
    Thanks for this informative piece. As a retail investor I have found the basics of this piece to be good building blocks for my own understanding. Keep up the good work. Tim M.
  • PS
    Patrik S.
    29 January 2021 @ 05:55
    Great job πŸ‘
  • AA
    ALLEN A.
    29 January 2021 @ 01:19
    Fantastic!
  • EF
    Eduardo F.
    29 January 2021 @ 00:48
    Brave for your initiative :-) An important tool to finally help us speak the same language. My thanks to the entire Real Vision team.
  • JC
    Jey C.
    29 January 2021 @ 00:01
    This is and was what the financial sector needed all along.. from the smartest people in the room. Thank you RV!
  • WP
    Wayne P.
    28 January 2021 @ 23:56
    Fantastic information. Thanks guys!