facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause
Is It Time to Invest in Bitcoin? Thumbnail

Is It Time to Invest in Bitcoin?


Like many people, I have been watching bitcoin from the sidelines for years. I have been skeptical. Bitcoin has no cash flows (earnings, dividends, interest, etc.), so it can’t be valued like most other investments. It has experienced enormous price gyrations. Some bitcoin investors have lost their “wallets,” had their accounts hacked, or had their custodian go bankrupt, losing some, most, or all of their money. Bitcoin-related businesses have been involved in fraud, scandal, and bankruptcy. Regulators have mostly either warned people away (U.S.) or banned it altogether (China). 

For years potential issuers of bitcoin ETFs have applied to the SEC for approval. However, the SEC had always turned them down, expressing a number of concerns. For example, the SEC said that there were too many different places to trade bitcoin, with too many different prices and even signs of manipulation. There was also concern about the custodial safekeeping of bitcoin. 

In October of 2021 the SEC did approve bitcoin ETFs that were based on bitcoin futures contracts, where divergent pricing and custodial safekeeping are not a concern. However, these ETFs could not track the spot price of bitcoin closely, and they charged a lot more than most ETFs—between .85% and 1.33%. 

Finally, in January of 2024, after many years of resistance, the SEC approved an application for a bitcoin ETF. Actually, they approved 11 applications. Now, it is as easy to invest in bitcoin as it is to invest in the S&P 500. And it doesn’t cost much. Most of the ETF managers charge only .25% per year in expense ratios.

The recent SEC move is a game changer for me and for man others. It is a strong indication that bitcoin has finally gained institutional acceptance. More institutions are investing in bitcoin all the time. Although SEC chairman Gary Gensler has been careful to avoid endorsing bitcoin as an investment, and has cautioned investors regarding bitcoin’s extremely high levels of historical volatility, the bitcoin ETF approvals make it much harder to write off bitcoin as an investment fad that may blow up or disappear. Although not widely offered in most 401k plans, bitcoin ETFs may even become a common 401k investment option over time. 

Since January, money has been cascading into the new bitcoin ETFs—over $30 billion of it. At this writing, bitcoin has a total market capitalization of over $1.3 trillion. By comparison, the U.S. stock market and the U.S. bond market each have a market cap of approximately $50 trillion. Thus, bitcoin is now about 1.3% of the overall U.S. capital market. It has become too big to ignore. 

Bitcoin ETFs

The table below provides some summary statistics for the 11 U.S. spot bitcoin ETFs listed in descending order of total assets:


In my opinion, the only important distinguishing characteristics among these 11 ETFs are the two cost components:

  • Expense ratio
  • Bid-ask spread

Many of the new bitcoin ETFs are offering temporarily reduced expense ratios (“Current Expense Ratio in the table above”). I prefer to focus on their permanent (gross) expense ratios. The ETFs that are of interest to me have expense ratios of .19% to .25%, a fairly tight spread. The largest and most liquid of them have average bid-ask spreads of .02% to .05%.   One way to compare total costs is to assume a round-trip purchase and sale within one year. The total cost for the round trip would be the gross expense ratio + twice the bid-ask spread. It’s pretty much a four-way tie among IBIT, FBTC, ARKB, and BITB. Fidelity is its own custodian for FBTC which may introduce a slightly increased security risk, although I am sure that Fidelity would argue the opposite. Investors who expect more active trading may prefer IBIT and FBTC for their lower bid-ask spreads. Investors who expect less active trading may prefer ARKB and BITB for their lower expense ratios. Because of the importance of frequent rebalancing (discussed below), I will be using IBIT.

Background Info on Bitcoin

Bitcoin is a “cryptocurrency” intended to provide an innovative medium of exchange that does not rely on any central authority, such as a central bank. Like paper money, it has no intrinsic value. Its value is a function of its acceptability by others as payment. However, whereas U.S. paper money has the full backing of the U.S. government and its taxing power, bitcoin does not have any backing from anyone. 

It is a stretch to call bitcoin a currency. Bitcoin has limited usefulness as a medium of exchange, one of the primary functions of a currency. Its value relative to other currencies, such as the U.S. dollar, is extremely volatile. Someone accepting bitcoin as payment based upon its current dollar value may find that its value has changed substantially by the time the bitcoin is exchanged for dollars. 

The vast majority of bitcoin transactions are probably related to its speculative value as a “crypto-commodity” rather than for buying pizzas. Another function of a currency is as a “store of value.” Historically, precious metals, especially gold and silver, were the primary store of value. Gold still fulfills this function to some extent. Bitcoin is currently being used primarily as a speculative store of value. 

I hesitate to call bitcoin an “investment,” because exchanging dollars for bitcoins does not contribute to capital investment. Stocks and bonds provide capital for businesses to grow. Bitcoin does not. That is not its intended function.

Bitcoin does have economic usefulness for many people. It provides a way for those who would like to avoid government scrutiny to store and exchange value. Although such parties would include drug dealers, tax evaders, cyber blackmailers, and illegal gamblers and weapons dealers, it also includes people who live under governments that control the export of capital. Also, bitcoin could eventually provide some banking functions for poor people who are outside of the traditional banking system. 

For most of us, bitcoin’s economic usefulness arises from its potential function as a long-term store of value that cannot, by its very design, suffer from oversupply. In this respect, bitcoin stands in stark contrast to all fiat currencies around the world, including the U.S. dollar. Ever since the dollar went off the gold standard in 1971, it has not had any external check on its rate of growth. The “money supply,” or number of dollars in worldwide circulation, could very well increase at a rate that will lead to inflation and a reduction in its value and purchasing power over time. Indeed, in the history of the world, all fiat currencies have been eroded by inflation over time. That can never happen to bitcoin. Growth in the number of bitcoins is defined in its underlying code, and the growth rate is very low. 

Critical to bitcoin is the “blockchain,” or use of transaction records that are linked using cryptography and verified by a large number of independent members of a network, called a “distributed ledger.”  In an activity known as “mining,” bitcoin network members are rewarded for providing this verification function for each incremental “block” of transactions by being awarded bitcoin as a byproduct of their effort. However, not every network member verifying bitcoin transactions is awarded bitcoin for verifying a new block. Instead, only one network member is awarded the bitcoin in a kind of lottery system. The lottery is won by solving a very complex mathematical problem (the “hash”). A hash function is a mathematical process that takes input data of any size, performs an operation on it, and returns output data of a fixed size. In bitcoin mining, the inputs for the function are all of the most recent, not-yet-confirmed transactions (along with some additional inputs relating to the timestamp and a reference to the previous block). The first one to solve the hash wins. The reward is not only a certain number of bitcoins but also the transaction fees paid by the parties to the transactions in the block. 

The origin of bitcoin was a 2008 paper by Satoshi Nakamoto, a pseudonym for the person or group that developed the logic and code behind bitcoin. Some important parameters were established in that original paper. For one thing, only 21 million bitcoins will ever be created. They are created when a miner solves the “hash,” but the rate of bitcoin creation is set to decline steadily over time. The number of bitcoins awarded to successful miners was originally 50, but the number is cut in half every 210,000 blocks. This “halving” is expected to occur about once every four years. The first halving occurred in November 2012, cutting the rate to 25 bitcoins. The second was in July 2016, when it was cut to 12.5 bitcoins. The next halving is occurred in May 2020, with a new mining award of 6.25 bitcoins. The most recent halving just occurred (April 2024), so the current mining award is 3.125 bitcoins.  

Price History

There is no central marketplace for trading bitcoin, so no single market price is universally recognized. The bitcoin data in this paper comes from Blockchain.com, before 12/31/2017, and is taken from the Bitstamp exchange (provided by FactSet) thereafter. Blockchain’s bitcoin price database starts on August 17, 2010, with a price of $.08. The price broke $1 for the first time in February 2011. Other pricing milestones were $100 in April 2013, $1000 in November 2013, and $10,000 in December 2017. These are tremendous percentage increases, but still so low compared to recent prices that most of the pricing history prior to 2017 hugs the zero line.

Bitcoin has had some MAJOR price corrections. It fell to a low of $176.50 on January 14, 2015 (a loss of 83% from its high). It ascended fairly steadily after that, rising to a peak of $19,289.79 on December 17, 2017. From there its fall was nearly as steep, bottoming on December 15, 2018 at $3,186.05 (another loss of 83%). After climbing to $67,535.08 on November 8, 2021, the price fell by 77% $15,780 on November 21, 2022. In its short trading history, bitcoin has had six drawdowns of more than 70%. Clearly, bitcoin investors have to be prepared for horrific losses.  

That said, without a doubt bitcoin has been the best performing major publicly traded asset of all time.

The price history of bitcoin falls into two regimes:  before and after December 31, 2013. The first regime was signified by extreme price volatility. Gandal et. al. examined trading activity in bitcoin during 2013 and found it highly suspicious. The SEC cited the potential for price manipulation prominently among its reasons for rejecting applications for a bitcoin ETF prior to January 2024. Their recent approval of spot bitcoin ETFs reflects the increased size and maturity of the bitcoin market since the early years. 

 In my attempt to model and explain bitcoin’s historical prices and returns below, I will focus on the second regime, starting December 31, 2013.  

Valuation of Bitcoin

Bitcoin cannot be valued as a traditional asset. The prices of all assets are set by the interplay of supply and demand of course. However, most assets have “intrinsic value” that can be externally estimated or derived, providing a basis for the price. For example, the value of financial assets can be estimated based on the present value of their future cash flows discounted at an appropriate interest rate. Bonds have coupon payments and the return of principal at maturity. Stocks have dividends and earnings. Real estate has rental income. The sum of the discounted future cash flows equals their intrinsic value.

Other assets have no cash flow, such as commodities. But commodities have economic uses that provide a reference point for valuation purposes. And they can often be substituted for each other to some extent (wheat vs barley vs corn or gold vs silver vs platinum) and can therefore be valued relative to each other. 

Some commodities do not derive the bulk of their value from their economic usefulness. Gold, for example, has economic usefulness in jewelry, but beyond that, most of its value is derived from its function as a “store of value.” It has functioned as a store of value for thousands of years because of its nearly universal decorative appeal and because its supply increases only very slowly, meaning its value will not be “inflated” away with large increases in supply. Gold is still used as a store of value and reserve asset by central banks around the world. In fact, many central banks (particularly those in anti-Western countries such as China, Russia, and Iran) have been adding significantly to their gold holdings as a negative reaction to the U.S. and its currency the U.S. dollar, which is still the world’s “reserve currency.”  

Bitcoin is sometimes described as “digital gold.” Bitcoin has no cash flow and no external economic use. Its value is strictly a function of the demand by its users. The supply of bitcoin will continue to creep up gradually at an ever-slowing pace until 21 million bitcoins have been mined (probably around the year 2140), at which point the supply will stop. At this point, 19.687 million bitcoins have already been mined, so the additional supply is quite limited. Since supply is so static, the price of bitcoin is a direct function of demand. 

Why do people have any demand for bitcoin at all? In its very earliest days, bitcoin was no doubt a curiosity among its very small user base of programmers and cryptographers. But there was enough interest to sustain its existence. Beyond that initial user group, it is my guess that libertarians formed its next base of support. Bitcoin has strong appeal among those who would like to see a much smaller role for government, and who resent central bankers’ control of the money supply. The philosophical appeal also attracts those who are worried by rampant growth in government deficit spending and aggressive monetary policies, including the paradigm-breaking purchase of long-term bonds and the forcing down of interest rates to zero and below. Many believe that as long as these fiscal and monetary policies continue, inflation will remain a problem. Buying bitcoin is one action that can be taken in response.  

There are several theories that attempt to provide a valuation for bitcoin. In my opinion, all of them fall short. 

The cost of production. One idea is that bitcoin’s price is supported by its cost of production. The “cost of production” in this case is the cost of mining bitcoin. There is some initial capital investment in buying a computer that is optimized for mining, but the primary cost is the ongoing cost of electricity. On the surface, it would seem extremely doubtful that the cost of production (which is fairly slow-moving) would explain much of the price gyrations in bitcoin over the years. And in fact, instead of the cost of production influencing the price, the relationship is really the other way around. The Bitcoin code itself provides an ongoing governor on the profitability of mining:  the “difficulty.”  This is a measure of how difficult it is to solve the block algorithm (the “hash”) and win the bitcoins. The code provides that a solution to the mining algorithm should be found every 10 minutes on average. The actual discovery rate is measured every 2016 blocks and the difficulty is reset to drive the discovery rate to every 10 minutes. When the average rises above this level (because the mining computers have become faster or more miners have joined the network, for example) the difficulty level is increased, driving up the cost of production. Conversely, if the price of bitcoin falls low enough to discourage miners from continuing to mine bitcoin, the difficulty level will be reset at a lower level, which will lower the cost of production and encourage more mining. It’s not the cost of production that causes the price. The price leads to automatic adjustments in the cost of production. 

Metcalfe’s Law. Another theory asserts that bitcoin’s price is related to Metcalfe’s Law:  that its value is a squared function of the number of bitcoin market participants. This idea has some validity on the surface. “Network effects” are a well-recognized factor in the value of blockbuster technology companies such as Amazon, Google, Apple, Facebook, Twitter, etc. However, it is not clear that the function is necessarily n-squared (n being the number of market participants). Nor is it possible to find a source for the number of market participants. Blockchain.com has a database for the number of unique bitcoin addresses, but it bears no statistical relationship to bitcoin price, and certainly does not includes all bitcoin owners. 

Stock-to-flow. The stock-to-flow model for pricing bitcoin compares the total bitcoins mined to date with the number of incremental bitcoins mined (over a short time period such as a month or a year). A high level of stock relative to flow means that the asset will not experience a flood of new supply relative to existing supply. In this respect, bitcoin is somewhat like gold, which has been mined for thousands of years, but which is subject to limited additional supply because of the relatively high cost of gold mining. A recent article in Forbes included the following table:

Bitcoin has a stock-to-flow ratio almost as high as that of gold. Its high price-to-flow lends credence to its potential function as a long-term store of value, much like gold has been for millennia. However, a stock-to-flow ratio of 58.3 does not imply any particular price for bitcoin, any more than a stock-to-flow of 62.3 implies a specific price for gold. Their value does not increase merely because their stock-to-flow numbers increase. As a pricing theory, the idea is that the price of bitcoin should be somehow directly related to its stock-to-flow does not hold water. For one thing, it focuses only on growth in the supply of bitcoin and completely ignores changes in demand. Also, since bitcoin’s stock-to-flow slowly but steadily increases over time, that would imply a similar behavior for bitcoin’s price. But its price history has been anything but slow and steady. 

The greater fool theory. In a sense, this is the only model that can be applied to an asset with no cash flows, no intrinsic value, and no inherent economic usefulness. Truthfully, bitcoin is entirely a speculative asset. The only reason that bitcoin has any value at all is that people believe it has value. They are confident that others will continue to believe it has value. In fact, they probably believe that others will give it an even higher value in the future than its present value as it continues to gain wider acceptance. 

Given the difficulty of valuing bitcoin, why invest in it? For me, the main attraction of bitcoin is as a long-term hedge against the devaluation of fiat currencies, including the world’s reserve currency, the U.S. dollar. Both fiscal and monetary policy in the U.S. seem oriented towards stoking economic demand through deficit spending and aggressively easy monetary policy. 

Government debt as a percentage of GDP remained under 65% for the post-WWII period, but jumped to over 100% after the global financial crisis of 2008 and to over 120% in the wake of the worldwide pandemic of 2020. Most of the spending is for social benefit programs of various kinds, none of which will enhance future economic productivity. Similarly, the Fed’s balance sheet had always hovered at around 6% of U.S. GDP before 2008. Monetary policy was implemented through changes in the fed funds rate and the discount rate. After those had been forced down to zero in the wake of the Great Recession, a new era of “quantitative easing” was introduced. The Fed began buying up bonds to drive down longer-term interest rates. Its balance sheet ballooned from under 6% of U.S. GDP to over 30%. These aggressive fiscal and monetary policies resulting in a spike in inflation starting in 2021. Despite extreme increases in interest rates since then, inflation continues to be a concern. 

Similar events played out around the globe over the past 15 years. All fiat currencies may experience increased inflation in the coming years. 

The role of the U.S. dollar as the world’s reserve currency is eroding, but not quickly. The U.S. dollar was 71% of global central bank reserves in 1999, but has dropped to 58% as of 2022. Russia’s invasion of Ukraine, and the U.S. attempts to freeze Russia’s dollar assets and prevent sales of its oil has caused many non-Western countries to diversify their dollar reserve holdings. More oil sales are now made in non-dollar currencies. Confidence in U.S. global leadership has waned. More non-Western countries are aligning themselves with China, Russia, and Iran.  

While not determinative, these trends bode well for bitcoin’s long-term outlook. The critical factor for bitcoin is often called “acceptance.” That is, how widely will it be used? As acceptance has grown, so has bitcoin’s price. Given the recent indications of institutional acceptance in the U.S., it seems likely that acceptance will continue to grow over the long-term. Also, demographics strongly favor increased acceptance in the years to come—younger people are much more favorably inclined towards bitcoin than older people. Bitcoin is already more popular in Europe and Asia than in the U.S. It is especially popular in inflation-prone Latin America. As developing markets continue to grow, this also bodes well for bitcoin. 

A small position in bitcoin as a long-term hedge against the erosion of fiat currencies, including the U.S. dollar, makes sense to me. It could collapse, but it could eventually become the world’s reserve currency (100 years from now). Given that the market capitalization of bitcoin is currently over 1% of the overall U.S. capital market, a 1% strategic allocation seems appropriate, with tactical room to over- or under-allocate from 0% to 2%.

This raises the question of how to determine the tactical target between 0% and 2%. For this, I have developed a tactical model. 

A Four Factor Model

I asserted above that there is no way to value bitcoin because it has no cash flows and therefore no intrinsic value. However, that does not necessarily mean that there is no way to model its expected returns, much the same way that commodity investors model commodity returns. Most commodity investors use some combination of long-term mean-reversion of return, short-term return momentum, and various economic or market factors. The model I present here uses a similar approach. 

My practice is to model the expected returns for ETFs using a one-month holding period. In practice I expect to update the model and make trading decisions monthly, so monthly periodicity fits my intended use of the model well.  

My bitcoin model forecasts monthly return (not price). I asserted above that only prices and returns after December 31, 2013 can be trusted (Regime 2) because of extremely high volatility and evidence of potential price manipulation before then. Consequently, I use only price and return data since December 31, 2013, which means my model is based on the 123 monthly returns since that date. 

Having established that the desired dependent variable is monthly return, the next task is to identify the independent variables used to forecast monthly return. There are four: 

1. Long-Term Mean Reversion

I struggled to identify some sort of “value” function for bitcoin that had any predictive value at all. The best factor I could come up with compares the current price to the five-year log linear forecast using the trailing 60-month return observations as inputs. The embedded assumption is that bitcoin’s price should not depart too far from the price predicted by its historical rate of increase. Only the most extreme departures from the linear forecast are meaningful. The variable I use is the cube of the difference between the forecast and the actual price. The graph below illustrates the cumulative return and trendline for bitcoin since December 31, 2013.

2. Option-Implied Volatility (VIX)

Although many boosters of bitcoin think of it as a safe harbor asset, the empirical evidence seems to indicate the opposite. At least at this point, bitcoin is still relatively new and untested. Consequently, it is a “risk-on” asset that does well when the market is confident and does poorly when the market is fearful. High and increasing levels of the VIX index (which measures expected volatility in 30-day S&P 500 options contracts) are negative for bitcoin expected returns and vice-versa. 

3. Return Momentum

Most commodities exhibit some trend-following behavior, and bitcoin seems to follow the pattern as well. The variable used in the model is an exponentially-weighted moving average of daily returns over the past 60 trading days.

4. Short-Term Rate Change

The monthly change in the three-month T-bill yield has had an effect on the price of bitcoin. As an asset with no yield, bitcoin becomes less attractive when interest rates are increasing and the opportunity cost of holding bitcoin goes up, and vice-versa. 

Four Factor Model Construction

Having settled on our four factors, the next step is to use the signals provided by these factors to construct an overall bitcoin return model. The simplest method would be to equal weight the signals provided by the four factors. However, not all of them have equal forecasting power. Also, they each work better at some times than at other times. 

To determine how much weight to put on each factor each month, I use a multiple regression that relates the signals of all four factors to bitcoin returns simultaneously. I use an exponentially-weighted moving average regression over the trailing 36 monthly observations so that more recent experience is more heavily weighted. The overall bitcoin monthly return forecast is simply the sum of the four components. 

The model forecasts begin in January 2018 because of the data history needed to specify the model. Therefore, 77 monthly forecasts have been generated to date. The graph below illustrates these monthly forecasts.

The monthly forecasts must be translated into portfolio weightings to be useful for investment purposes. Typically, I “standardize” model forecasts by comparing the current month to the trailing 120-month history of the forecasts. Specifically, I subtract the 120-month average forecast from the current forecast and divide the result by the 120-month standard deviation of the forecasts. This results in a “standardized” indicator (often called a “z score”) that measures how many standard deviations the current forecast is above or below the 120-month moving average. 

However, we only have 77 forecasts so far. Consequently, we can only standardize the current forecasts relative to the observations available up to that point. The graph below shows how the 77 forecasts (blue bars, left hand scale) could be translated into portfolio weightings (orange line, right hand scale). The most negative forecast results in a 0% position in bitcoin, and the most positive into a +200% position in bitcoin. This scale can be adopted for any range of bitcoin allocations. For client portfolios with a 1% strategic bitcoin allocation, the tactical range would be 0% to 2%. 

Model Results

The bar graph below shows the monthly returns from the model bitcoin allocations (in blue) and a 100% bitcoin allocation (in orange). The model avoided a couple of the larger downdrafts in 2017 and 2018, and captured upside during a couple of the largest monthly gains in 2019 and 2020. Since then, the target allocation has hovered close to 100% so the value-added, though still present, has been muted. 

The cumulative return graph below shows an ending value for the model of 755% compared to 515% for the 100% bitcoin investment. The annualized average monthly return was 72% for the model and 59% for bitcoin. 

I would not put too much emphasis on the model’s empirical backtest results. In my opinion, it is much more important to have confidence in the fundamental logic of the four factors in the model. Do they make sense? Also, the weight among the four factors is strictly determined by their empirical statistical power over the preceding 36 months. At times, each of them has had a weight of zero. By design, the model is dynamically self-correcting to changing conditions and behavior. 

Portfolio Contribution

A 1% allocation to bitcoin seems quite defensible based on the fact that bitcoin is already over 1% of the entire U.S. capital market. But how much could a 1% allocation contribute to a portfolio? On its face, a 1% allocation to any investment would seem to have only a minimal effect on the overall portfolio. However, bitcoin has had such extremely high returns, and extremely high volatility, even a 1% allocation can have a noticeable effect.

One study using data from August 2010 to October 2017 found that an optimal allocation to bitcoin was 1.3% over the sample period. That same study also found the bitcoin has a low correlation with other assets, providing portfolio diversification benefits. Other studies have found 1% to 2% to be an optimal allocation as well, and they also cite bitcoin’s diversification benefits.  

For example, according to research from the CFA Institute Research Foundation, from January 2014 to September 2020, a 1% investment in bitcoin added to a traditional 60/40 portfolio boosted return by 1% (from 6.2% to 7.2%) with no increase in portfolio volatility. Of course, this was during a time when bitcoin’s price increased from $715 to $10,775, an increase of 1,407%. 

But high bitcoin returns are not necessary for portfolio benefits. Even negative bitcoin returns can result in portfolio benefits as long as the portfolio’s bitcoin allocation is regularly rebalanced backed to the strategic target weight. The CFA study was implemented with quarterly rebalancing back to the original 1% allocation. It found that disciplined quarterly rebalancing was vital in managing an allocation to bitcoin. The same CFA study found that even if bitcoin was bought at the all-time high within the time period studied (12-16-2017) and held to the study’s end (9-30-2020), during which time bitcoin fell in price by 45%, the addition of bitcoin would have improved portfolio return by 1.8%. How can that be? To quote the study:

“The answer comes from bitcoin’s combination of high volatility, low correlation, and liquidity, which allows rebal­ancing…applying a disciplined rebalancing strategy to a volatile, noncorrelated asset can yield positive portfolio impacts.”

In the long run, getting the monthly tactical targets right may not be nearly as important as having monthly tactical targets in the first place. These will cause the tactical bitcoin allocation to be rebalanced around the 1% strategic allocation, harvesting portfolio benefits. With very high volatility, even a negative average bitcoin return can have a positive portfolio impact because regular rebalancing will automatically result in buying low (when the tactical allocation gets too low because bitcoin’s price has fallen) and selling high (when the tactical allocation gets too high because bitcoin’s price has risen).  

Summary and Conclusions

  • The SEC’s approval of 11 spot bitcoin ETFs is a game changer. It signals and reflects institutional acceptance of bitcoin.
  • Now owning bitcoin can be easy, secure, and inexpensive. 
  • Four of the 11 spot bitcoin ETFs have both a low expense ratio (.25% or less) and narrow bid-ask spreads (.05% or less):  IBIT, FBTC, ARKB, and BITB. My preference is IBIT.
  • The market capitalization of bitcoin now makes it over 1% of the total U.S. capital market. It’s too big to ignore.
  • Although called a “cryptocurrency,” bitcoin is not a good short-term medium of exchange. It is more a speculative long-term store of value. 
  • The logic behind the bitcoin code prevents it from being inflated through oversupply. In contrast, all fiat currencies throughout history have eventually been eroded (or even decimated) by inflation. 
  • Bitcoin’s price has crashed regularly. There have been six drawdowns of over 70%. 
  • Because it has no cash flow, bitcoin cannot be valued as a traditional asset (stock or bond). Its price is extremely sensitive to changes in demand/investor emotion.
  • I find some (limited) value in a monthly bitcoin return model, similar to models often used for commodities.
  • I find that four factors are significant:  1) long-term mean reversion, 2) option-implied volatility (VIX index), 3) return momentum, and 4) change in short-term interest rates.
  • The portfolio benefit from a 1% bitcoin allocation is mostly related to its low correlation with other assets and its extremely high volatility, coupled with a willingness to tactically rebalance in a disciplined fashion.