When geopolitical and macroeconomic volatility hits, it’s only natural to feel inclined to reassess your investment portfolio and the path forward. Long-term investors know that selling during dips historically leads to overall portfolio losses and that buying during a market downturn can provide an opportunity for profit. But what if the asset in question is itself reputed to be volatile?

Our Global Head of Research, Eliézer Ndinga, and our Head of Macro, Stephen Coltman, answer three of the pointiest questions floating around in the market right now.

Q1: Surely Bitcoin is too volatile to be considered truly investable?

Stephen: With appropriate sizing, volatility in an asset that is part of a diversified portfolio can actually make an allocation more attractive rather than less. Running a portfolio that is periodically rebalanced back to a target asset allocation means that, with a volatile asset like bitcoin, you are trimming after periods of strong gains and topping up after periods of decline. This mechanistic process of trimming into strength and buying on weakness can meaningfully improve the overall return and risk characteristics of the broader portfolio.

Eliézer: Bitcoin is actually not too volatile if the position size is kept low and maintained through annual rebalancing. At 42% annualized realized volatility (slightly above NVIDIA’s 39%), a bitcoin allocation of at least 5% has historically lifted the Sharpe ratio of a 60/40 portfolio from 0.45 to over 1. This is because its long-term correlation to equities runs low (on par with gold), meaning it tends to move independently from stocks and bonds.

Q2: Isn’t Bitcoin just a levered play on the Nasdaq and tech stocks?

Stephen: Bitcoin does have some sensitivity to broader technology and software trends, but it is a fundamentally different type of asset – a fact that becomes apparent in times of stress, as we see right now with the war in the Middle East. Bitcoin is an asset without counterparty risk; it is nobody’s liability. This is a feature that has more in common with gold than with tech stocks.

When people are worried about the stability of their local banking system or the soundness of their local currency, they turn to crypto, where they are guaranteed to maintain access to their assets and retain the ability to transact. Therefore, you see the diversification benefits and the change in the correlation profile at the times when it is most valuable. When markets are stressed and correlations between other asset classes are rising, the Bitcoin correlation to the rest of a typical investor’s portfolio can actually fall.

Eliézer: Bitcoin is both a risk-on asset (like a tech play) and a risk-off asset (akin to gold). March 2023 is the cleanest proof. When SVB collapsed and Credit Suisse got bailed out, bitcoin rallied by more than 20% in a single month while tech sold off, flipping its correlation to behave like gold as investors fled counterparty risk, because bitcoin is non-sovereign, censorship-resistant, and runs on no one’s balance sheet.

It’s also worth noting that bitcoin follows a transparent, fixed issuance schedule – the opposite of fiat currencies, where central bank intervention and QE directly expand the money supply and inject liquidity into the financial system – making bitcoin’s monetary policy arguably more predictable than gold or any fiat systems.

Q3: Bitcoin momentum is negative. Why should I buy now? Why not wait?

Stephen: Bitcoin is a volatile asset, and market sentiment can turn quickly. Over the short term, market timing is generally a fool’s errand, in our view. Instead, we recommend your Bitcoin allocation be periodically rebalanced back to its target weight through future market cycles, where trading is done systematically in response to market fluctuations rather than by attempting to forecast the short-term direction of the market.

Eliézer: Timing markets is hard, and bitcoin is beyond a trade; it’s a long-term position in an emerging store of value where the holding period is what drives the outcome. What’s worth paying attention to are the fundamental indicators: leverage levels for speculation, the cost basis of ETF and direct investors, and Google Trends for market sentiment. All of these can help gauge whether you’re looking at a structurally oversold market versus a broken one. Right now, they’re telling a more constructive story for a long-term emerging store of value that’s down over 40% from its peak.

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Each week the 21Shares Research team will publish our data-driven insights into the crypto asset world through this newsletter. Please direct any comments, questions, and words of feedback to research@21shares.com

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