Amidst the fervor surrounding the meteoric rise of cryptocurrencies, particularly Bitcoin, discussions regarding its place in investment portfolios have been abundant. Recently, JPMorgan analysts have weighed in on this debate, offering insights that may temper some of the more optimistic projections.
The crux of the matter lies in the comparison between Bitcoin and gold, both often touted as alternative stores of value. Some proponents of Bitcoin argue that it should eventually match gold in terms of its presence within investment portfolios. However, JPMorgan analysts, led by Nikolaos Panigirtzoglou, challenge this notion, highlighting the crucial factor of risk that is often overlooked.
In a recent report, the analysts assert that while there have been substantial inflows into newly-launched spot Bitcoin exchange-traded funds (ETFs) in the U.S., expecting Bitcoin to match the notional amounts of gold within investors’ portfolios may be unrealistic. They emphasize that investors typically consider risk and volatility when allocating across asset classes. Given that Bitcoin exhibits approximately 3.7 times higher volatility than gold, the analysts argue that expecting Bitcoin to match gold in notional amounts within portfolios is likely impractical.
To illustrate this point, the analysts propose a scenario where Bitcoin matches gold in terms of risk capital, resulting in an implied allocation that is significantly lower than the current levels. Based on their calculations, they suggest a potential Bitcoin price of $45,000, considerably lower than its current level of $66,000. This implies that the implied allocation to Bitcoin within investors’ portfolios has already surpassed that of gold in volatility-adjusted terms.
Bitcoin ETFs inflows
Despite these reservations, the analysts also acknowledge the significant inflows into spot Bitcoin ETFs, projecting around $62 billion worth of inflows within the next 2-3 years. They base this projection on the premise that if gold is used as a benchmark and the same volatility ratio is applied, it suggests a potential size for Bitcoin ETFs. This, they argue, represents a realistic target for the potential size of spot Bitcoin ETFs over time.
However, it’s crucial to note that much of this projected net inflow could result from a continued rotational shift from existing instruments to ETFs. In fact, spot Bitcoin ETFs outside of Grayscale Bitcoin Trust have already witnessed a cumulative inflow of $19 billion since their launch, nearing half of the projected rotational shift anticipated by JPMorgan throughout 2024.
Yet, there remains skepticism regarding whether the entirety of this inflow represents new money entering the cryptocurrency space. The analysts suspect that a considerable portion of these funds may come from retail investors shifting from existing instruments and venues to new spot Bitcoin ETFs.
In conclusion, while the rise of spot Bitcoin ETFs and the potential influx of funds into the cryptocurrency market are significant developments, it’s essential to approach these projections with a level of caution. JPMorgan’s analysis underscores the importance of considering risk and volatility when evaluating the role of Bitcoin within investment portfolios, suggesting that expectations for Bitcoin to match gold in notional amounts may be overly optimistic.
