How Bitcoin Benefits From Global Stresses

Deficits - Inflation - War - Bank Failures - Cyber Attacks - De-dollarization.

These risks loom large as they threaten stock and bond returns for investors. Historically, U.S. Treasuries have been a “safe haven,” providing some protection from crises, but from 2021 - 2023, Treasuries delivered -10%, their worst 3-year performance since at least the 1980s. Similarly, the 60/40 diversified portfolio suffered its worst performance period in 14 years with a return of -16% in 2022.

In an increasingly uncertain world, what’s an investor to do?

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In his book “Anti-Fragile,” Nassim Taleb explores the unique characteristics of things that gain from disorder. The immune system, for example, is more effective after exposure to a cold. Laws are clarified by suits and appeals. Software is “battle hardened” by hackers who exploit flaws.

What if you could add a portfolio asset that may benefit from global stresses? That is improved by uncertainty and volatility?

Consider bitcoin. The Bitcoin network appears to thrive on stress. When the Chinese government banned bitcoin mining in 2021, ~50% of bitcoin mining capacity was forced to shut down or move. Within seven months, capacity had completely recovered, and it is now over 2x what it was prior to the Chinese shutdown. In the past 15 months, the world’s second largest crypto exchange declared bankruptcy, and the largest exchange was sanctioned by the U.S. Department of Justice. Bitcoin network transactions were unaffected, and trading volumes are near all time highs.

As an asset, Bitcoin may be increasingly anti-fragile as well. When Silicon Valley Bank collapsed on March 10, 2023, fears of contagion sent stocks down by over -1% the next trading day, but bitcoin rose by 20%. This “safe haven” price response was a new phenomenon for bitcoin, and time will tell if it persists. But bitcoin is outperforming all other asset classes over the last 1, 3, 5, and 10 years, periods that include many stresses.

Research from Galaxy shows that a 1% allocation to bitcoin in a 55% S&P 500 / 35% Bloomberg U.S. Agg / 10% Bloomberg Commodity portfolio over 5 years from August 2018 - August 2023 would have resulted in higher returns and better risk adjusted returns, with virtually no impact on volatility or max drawdown:

Last week, Fidelity added bitcoin to its diversified ETF portfolios in Canada, with a 1% allocation for the Conservative ETF and a 3% allocation for the Growth ETF. With many bitcoin ETFs now available in the US, such as the low cost Franklin Templeton EZBC or iShares IBIT, it is easy for US investors to follow suit.

Little by little, your portfolio may gain a lot.