BlackRock’s Observations of Bitcoin: A Journey of Risk, Return, and Purpose

KEY POINTS

• Bitcoin’s long-term risk and return drivers are fundamentally uncorrelated with traditional financial assets, making it a unique diversifier for modern portfolios.

• Despite its high volatility, Bitcoin has outperformed major asset classes over the past decade, rewarding patient investors through its ability to rebound from significant drawdowns.

• As global concerns over monetary instability and geopolitical risks grow, Bitcoin is increasingly seen as a potential safe haven and hedge against traditional market disruptions.

👉 Bonus: Below you will find five ChatGPT prompts that you can use to develop your expertise in this area.

In the past 15 years, Bitcoin has traveled an unprecedented path, evolving from a niche digital curiosity to a core holding for a growing number of individual and institutional investors. The world’s first decentralized, non-sovereign digital currency, Bitcoin has captured the imagination of millions while challenging traditional views on currency, risk, and investment. According to BlackRock’s recent report, Bitcoin: A Unique Diversifier, the cryptocurrency’s journey has been one of both volatile swings and long-term promise. Yet, its allure lies in the distinct nature of its risk and return drivers, fundamentally uncorrelated to traditional financial assets.

Bitcoin’s relationship with macroeconomic factors is undeniable, particularly the actions of central banks. Recent developments in Japan and the United States underscore this connection. Following the Bank of Japan’s (BoJ) decision to keep interest rates unchanged, Bitcoin experienced a modest rally.

Bitcoin's recent price activity, however, reflects a broader struggle to break out of a six-month downtrend. Analysts note that Bitcoin remains "pinned below $65K," encountering persistent resistance between $64,000 and $66,000.

A Revolutionary Asset: From Obscurity to Global Adoption

Bitcoin’s inception in 2009 by an anonymous entity, known as Satoshi Nakamoto, sparked the creation of a monetary system unlike any before it. Unlike government-backed fiat currencies, Bitcoin operates on a decentralized, global network with a fixed supply cap of 21 million units, a characteristic BlackRock identifies as one of its strongest appeals. This finite supply means Bitcoin cannot be easily manipulated or debased, a frequent issue in traditional fiat systems. Its digital nature allows for real-time, cross-border transactions, bypassing traditional barriers associated with moving money across jurisdictions.

Over time, Bitcoin’s technological foundation—a permissionless blockchain network which is a system of physically distributed computers running a copy of a shared ledger and using the same software rules that enable all network participants to "read, submit, and validate transactions" (Beck, Müller-Bloch, and King, 2018, p. 1022)—has set it apart from previous attempts at digital money. Early pioneers like David Schaum’s DigiCash failed to take off in the 1990s, but Bitcoin has triumphed, now with over 580 million global cryptocurrency users, holding more than 50% of the crypto market’s total capitalization.

Price Stagnation: Can Bitcoin Break Through $65K?

Bitcoin's recent price activity reflects a broader struggle to break out of a six-month downtrend. Analysts note that Bitcoin remains "pinned below $65K," encountering persistent resistance between $64,000 and $66,000. Even with favorable macroeconomic conditions, including central bank dovishness and institutional endorsements, Bitcoin has yet to overcome these technical barriers.

The main issue, according to technical analysts, is Bitcoin's inability to secure a weekly close above $65,000, a level seen as critical for initiating a new bullish phase. Futures-driven liquidations and options market activity have dominated recent price movements, leaving spot trading volumes relatively flat. This disconnect between futures and spot markets highlights a fundamental challenge for Bitcoin: the market's structural complexity is now driven largely by derivatives, which often exacerbate volatility rather than reduce it.

Moreover, traders and analysts point out that sustained upward movement will require more than just macroeconomic catalysts. As noted by analysts, for Bitcoin to push past $65,000, it must attract significant spot volumes and break through descending trendlines on the charts. Without this confluence of factors, Bitcoin could once again retest lower support levels, delaying the much-anticipated rally to six-figure territory.

Bitcoin as a Unique Diversifier: Risk and Return in a New Dimension

One of the most common questions BlackRock receives from clients is whether Bitcoin is a “risk-on” or “risk-off” asset. Traditional finance relies heavily on this distinction, categorizing assets based on their behavior during periods of economic strength (risk-on) or weakness (risk-off). Bitcoin, however, defies such binary classification. As BlackRock’s analysts point out, its long-term return drivers remain uncorrelated with other sources of portfolio returns, such as equities or bonds, and it has demonstrated a unique ability to act independently of macroeconomic forces.

Although Bitcoin has shown occasional short-term volatility—especially during market sell-offs—it generally rebounds quickly, and its long-term performance remains vastly superior to that of traditional assets. BlackRock highlights a recent episode from August 2024, when Bitcoin dropped 7% alongside a 3% decline in the S&P 500. This downturn was primarily attributed to the unwinding of the Japanese yen carry trade, exacerbated by the liquidation of bankrupt assets from companies like Genesis and Mt. Gox. However, within just three days, Bitcoin had regained its losses, reflecting the resilience that has been a hallmark of its historical performance.

This volatility can be unnerving, but as BlackRock stresses, the underlying fundamentals of Bitcoin—scarcity, decentralization, and borderless transferability—continue to attract long-term investors. Like Warren Buffett’s observation about the stock market transferring wealth “from the impatient to the patient,” Bitcoin rewards those who can endure its short-term turbulence.

Performance Drivers: Bitcoin and the Global Macro Picture

In its analysis, BlackRock points out that while Bitcoin can sometimes move in tandem with equities during short-term liquidity events, its long-term correlation with traditional financial assets remains low. Bitcoin’s performance has been largely driven by factors unrelated to the forces that impact most other assets, such as global monetary policy, inflation rates, and geopolitical stability.

Bitcoin’s role as a hedge against inflation, in particular, has become a key part of its appeal. With concerns rising over the sustainability of U.S. fiscal and political stability, investors are increasingly turning to Bitcoin as a potential alternative to traditional reserve assets. While gold has long been viewed as the quintessential store of value during times of monetary uncertainty, Bitcoin’s properties make it a compelling modern alternative. Its digital nature allows for real-time, borderless transfers, and its decentralized network ensures that no single entity can control or manipulate the currency.

Moreover, BlackRock’s research highlights that Bitcoin has outperformed all major asset classes in seven of the last ten years, leading it to an extraordinary return in excess of 100% annualized over the last decade. This performance was achieved despite Bitcoin also being the worst-performing asset in the other three of those ten years, suffering four drawdowns in excess of 50%. Such volatility is rare among traditional assets but reflects Bitcoin’s status as an emerging technology with an evolving market.

Bitcoin’s long-term performance (Source: BlackRock)

Central Bank Policies: A Catalyst for Crypto Markets

Bitcoin’s relationship with macroeconomic factors is undeniable, particularly the actions of central banks. Recent developments in Japan and the United States underscore this connection. Following the Bank of Japan’s (BoJ) decision to keep interest rates unchanged, Bitcoin experienced a modest rally. The dovish signals from Japan’s central bank provided a respite from the broader selloff seen earlier in 2024, as higher interest rates globally triggered a risk-off sentiment among investors.

The BoJ’s move reduces the risk of further "yen carry trade" unwinds — a strategy where investors borrow low-yield currencies (like the yen) and invest in higher-yielding assets, such as Bitcoin. By maintaining ultra-low rates, the BoJ inadvertently supported risk-on trades, boosting demand for assets like Bitcoin. This dynamic highlights how global monetary policy is increasingly intertwined with cryptocurrency markets, where central bank decisions can trigger significant moves in digital asset prices.

Similarly, in the U.S., the Federal Reserve’s unexpected 50-basis-point interest rate cut further fueled market optimism for Bitcoin. The cut, seen as a pivot away from the Fed’s previous hawkish stance, helped propel Bitcoin’s price to just below $65,000. Yet, despite these short-term gains, Bitcoin has struggled to break through key resistance levels, suggesting that while central bank policies may offer temporary relief, broader market dynamics and investor behavior continue to exert downward pressure.

Bitcoin as a Hedge: A New Safe Haven?

Despite its volatility, BlackRock notes that Bitcoin has increasingly been seen by some investors as a “flight to safety” in times of geopolitical upheaval. In recent years, Bitcoin has reacted positively to major global disruptions, including the U.S.-Iran tensions of 2020, the onset of the COVID-19 pandemic, and the 2022 Russian invasion of Ukraine. In each of these instances, Bitcoin first exhibited a negative reaction—often due to a scramble for liquidity—but subsequently rallied as its fundamental characteristics began to attract more attention from investors.

The August 2024 sell-off, in which Bitcoin fell alongside traditional markets, offers a clear example of this dynamic. The cryptocurrency’s swift recovery reflects its evolving role in the global financial landscape, as a store of value and as an alternative to traditional financial assets.

5 PROMPTS THAT ATHLETES CAN USE TO DEVELOP AND BUILD EXPERTISE

• Explain how Bitcoin’s decentralized structure and scarcity can benefit investors looking to diversify their investments beyond traditional asset classes.

• How can athletes strategically incorporate Bitcoin into their financial portfolios to balance risk and reward, and what are the potential long-term benefits?

• Describe the role of Bitcoin as a hedge against inflation and geopolitical risk, and how this could impact athletes’ financial planning in times of economic uncertainty.

• What are the key risks athletes should consider when investing in Bitcoin, and how can they mitigate volatility while maximizing returns?

• Explain how Bitcoin’s performance compares to other asset classes like equities and bonds, and why athletes should consider it as part of their overall investment strategy.

👉 Check ChampionsChat GPT for your prompts.

Portfolio Diversification: A Tool for Modern Investors

For investors, the challenge remains how to integrate Bitcoin into their broader portfolios. BlackRock’s analysis reveals that even modest allocations of Bitcoin—at low single-digit percentages—can have a material positive impact on the risk-adjusted returns of a portfolio. In particular, adding Bitcoin to a traditional 60/40 portfolio (60% equities, 40% bonds) has historically improved the portfolio’s Sharpe Ratio, a key measure of risk-adjusted performance.

However, BlackRock warns that larger allocations to Bitcoin can increase portfolio volatility. While Bitcoin’s long-term return potential remains high, its short-term volatility can be disruptive if not managed carefully. Investors must balance the potential upside of Bitcoin with its inherent risks, especially given its still-immature ecosystem and regulatory uncertainties.

Conclusion: Bitcoin’s Future as a Global Monetary Asset

As we move towards the final quarter of 2024, the outlook for Bitcoin remains cautiously optimistic. With institutional interest growing, evidenced by BlackRock’s research and SEC’s recent approval for listing and trading options tied to a Bitcoin ETF, and central bank policies providing periodic support, Bitcoin’s path forward seems more secure than in previous years. However, Bitcoin still faces considerable challenges, particularly in breaking through key technical resistance levels and navigating an increasingly complex derivatives market.

BlackRock’s observations provide a balanced view of both the opportunities and risks associated with this unique asset. As global concerns about monetary instability, fiscal sustainability, and geopolitical risks continue to mount, Bitcoin may become an increasingly attractive diversifier for investors seeking refuge from traditional financial systems.

Its status as a global, decentralized, and non-sovereign asset with credible scarcity makes it unlike any other investment available today. While Bitcoin’s volatility may deter some, BlackRock emphasizes that those who understand its long-term fundamentals and can tolerate its short-term swings stand to benefit the most. As Bitcoin continues its journey toward widespread adoption, it may well become a cornerstone of the modern, digitally-driven financial world.

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I really appreciate you reading my note today.

Peace,

Irg

Irg’s work is provided for informational purposes only and should not be construed as legal, business, investment, or tax advice. You should always do your own research and consult advisors on these subjects. This work may feature assets and entities in which the author has invested.

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