Bitcoin is a disruptive technology that offers a new way to store wealth in a digital format, supported by investors’ long-term concerns about debt and debasement. As long as those trends persist, the long-term trajectory for bitcoin remains upward despite volatility. Bitcoin is its digital analog to gold—a store of value that can be held digitally without government or bank involvement and attracting demand across institutions and retail.
From a portfolio construction perspective, bitcoin has low correlations to stocks and essentially zero to bonds, making it a meaningful diversification. There has never been a three-year period in which adding bitcoin to a portfolio, if you rebalance, didn’t boost risk-adjusted returns. To manage behavioral risk, many investors dollar-cost average into a bitcoin position and maintain a long-term holding strategy. The biggest risk is behavioral—investors risk overexposure at peaks and panicking at declines.
Bitcoin’s price is set by supply and demand; the network currently produces about 164,000 bitcoin annually, with flows into ETFs and purchases by corporations exceeding that amount, signaling persistent institutional demand. Last year, existing bitcoin holders were willing to sell some bitcoin because it had gotten up to a nice round number, the $100,000 level. I think what’s happening in the market this year is you have this persistent institutional demand that’s greater than new supply, and then you have retail investors who are still selling because they’re happy to sell bitcoin at $100,000. Eventually, over time, we’re going to plow through those retail sellers, and the net institutional demand will overwhelm that supply coming from those retail sellers.
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