Bitcoin is a risk-asset rather than a safe haven. Similar to equities, bitcoin experienced a strong rebound this year as central banks unleashed an unprecedented amount of global liquidity. On the other hand, traditional safe haven assets, such as fixed income and cash, have done their job of producing low but stable returns, which is far from the characteristic of bitcoin. 

Investors tend to diversify a portfolio of assets to minimize risk. In the risk bucket, they’ll allocate towards growth stocks, cyclicals and commodities. And in the defensive bucket, you’ll find sovereign debt, high-dividend stocks and cash. 

Damanick Dantes, CMT, is a macro trader specializing in commodities, equities and crypto. He previously worked on the global asset allocation research team at Fidelity Investments.

Where does bitcoin fit in? 

Alternative assets, such as bitcoin and gold, provide investors with “non-traditional” (uncorrelated) returns. The typical alternative portfolio bucket holds assets for about 10 years, which includes illiquid investments in private equity, real estate and venture capital. However, bitcoin is tradable, which means that it is more liquid – making it a good candidate for long/short strategies typically used by hedge funds. 

There’s a new wave of institutional investors in digital assets, and they’re not your typical investment advisers. Large funds that invest in alternatives are starting to view bitcoin as an attractive risk bet in their portfolios. We’re talking about an estimated $14 trillion market in alternative assets by 2023, according to a Preqin survey of institutional investors.  

Guggenheim, a global asset management firm, recently announced it may seek indirect exposure to bitcoin. The firm’s Macro Opportunities fund may invest up to 10% of its net asset value in Grayscale Bitcoin Trust (GBTC) – about $497 million. (Grayscale is a sister company to CoinDesk.)

Here are four charts that illustrate bitcoin’s use as an alternative risk asset. 

Bitcoin has risen in tandem with the Federal Reserve’s balance sheet. After a two-year period of winding down its balance sheet, the Federal Reserve returned in full force this year to resume its asset purchasing program. As a result, the “Fed put” (a belief the Fed is always there to rescue the economy and financial markets) has boosted the appeal of bitcoin as an alternative risk asset.

The number of investor-held bitcoin is rising. Wallets that store bitcoin for the long term are less likely to succumb to profit-taking. This holding trend means that investors are increasingly taking the place of traders as bitcoin matures.

Large owners continue to hold most of bitcoin. Unlike traditional assets, the massive concentration of bitcoin holdings means that a large holder can have an outsized impact on price movement. And this is where alternative portfolio strategies come in.

Bitcoin remains in a long-term uptrend. Systematic portfolios manage volatility by adjusting positions based on price trend. One method is to calculate bitcoin’s market value relative to its realized value (MVRV). The ratio suggests that bitcoin is currently trading above “fair value,” albeit below previous extremes. 

These trend systems are commonly used in the managed futures industry which has $303.6 billion in assets under management, a large sum of money that could flow into digital assets.

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