What does a Bitcoin allocation look like in a portfolio?

Our next presenter is Pratik Kala, Head of Research at DigitalX.

Pratik has eight years of experience in investing and trading digital assets.

He started mining Bitcoin in 2016 and ventured into the world of Ethereum, decentralized finance and Web3.

His presentation topic today is what does a Bitcoin allocation look like in a portfolio?

Welcome to the presentation, Pratik.

Thanks, Angelina.

Hi all, my name is Prithik Kala and I will be talking about what Bitcoin looks like in a portfolio.

This is a quick disclaimer and let's jump straight into it.

So before I talk about Bitcoin and its effect in a portfolio, let's have a quick stroll through the history of fiat currencies, fiat currencies being the currencies that we use today.

I'm going to show a whole bunch of currencies from various different countries, but do notice the big numbers behind them and the number of zeros that are there.

So starting from Greece in 1943, Hungary 1945, Argentina 10,000 pesos, Russia 10,000 rubles 1992, Brazil 500,000 rials 1993, Ukraine, Turkey, we're in the millions and Venezuela.

You'll notice that there's been a constant barrage of currencies that have come and gone over a whole bunch of different countries.

And this is not even the biggest currencies that have been out there.

Germany actually had a currency issue with one billion Deutschmarks in 1923 and the best for the last Zimbabwe with a hundred trillion dollars in 2006.

So you may think that these are isolated incidents and only affect other countries and you know the G8, G20 economies are relatively isolated from this but I beg to differ.

So actually the question then is how much confidence do you actually have in your store of value?

Now, over 500 different fiat currencies have failed over the last 250 years due to hyperinflation, war, independence or replacement.

That is roughly two currencies failing every year on average, with the average lifespan of a currency being just about 25 years.

You know, a lot of the currencies we use today, including the Aussie dollar, Euro and Japanese yen, only started circulating less than 50 years ago, with the Euro specifically less than 25 years ago.

The USD has been one of the longest serving fiat currencies to date, but has been debased several times and all links to gold was removed in 1971 with the Nixon shock.

So prior to that, you could redeem with one US dollars, you could redeem it for a certain amount of gold.

All of that had disappeared in 1971.

Today, we are in a world where all exchange rate stabilization mechanisms for currencies are a constant tug of war between geopolitics, trade and trust.

Our money is created out of thin air and all links to gold has broken since 1971.

And it is based on the faith of the free markets today.

This actually brings us to the point of there being an inherent need to separate money from the state.

So we have Jerome Powell here from a very famous interview in 2021 where the interviewer practically asked him, so fair to say he simply flooded the system with money.

And Jerome Powell answered, yes, we did.

The interviewer asked, where did the money come from?

Did you just print it?

And Jerome Powell rightfully said, we print it digitally.

And as a central bank, they have the ability to create money digitally and they can do it at will and at scale as much as they want to.

And the facts are there, and we know this, and we can track this with the total public debt, which is practically 10x in the last 25 years.

So a staggering amount.

We started with roughly $4 trillion.

We're currently at $36 trillion in the US.

And an even more alarming chart is our money supply.

If you look at it, we had a steady rise since 2006.

However, in COVID, we practically created 25% of all the money in existence.

went from roughly $16 trillion to well over $22 trillion.

And people wonder why there's inflation, you know.

So there is, you've got to think about this as a question on what is the value of the currency and what happens to all these currencies over a long enough period.

So this is where Bitcoin comes in.

So what is Bitcoin?

It is a decentralized store of value.

When I say decentralized, I mean no single person, central entity can control, tamper, print it, inflate it or destroy it.

It is globally distributed and it is public.

So there is no siloed databases where a couple of central bankers can go behind closed doors and manipulate or tamper with it.

And it's not controlled by a few people.

It's controlled by a network of computers globally.

It has an immaculate and fair conception that was created by Satoshi Nakamoto and the personal group of people just disappeared.

So it was just immaculate conception.

There's no sort of CEO or central banker for Bitcoin.

It has a fixed supply, making it very scarce.

It has a fixed inflation schedule and it's well known in advance till the year 2140.

So another 120 years from today.

It is impossible to game the system.

And the final point is that Bitcoin is the most computationally dense network in the world.

When I say that, I mean,

If all the governments in the world got together and decided that, look, we got to do something about Bitcoin, for example, it would be impossible for them to crack the network or hack into the network or manipulate Bitcoin.

That's how computationally dense it is today because of 10 years of evolution and investment from multiple miners.

But that's all well said.

But what is actually the impact of Bitcoin in a portfolio?

So let's actually construct a portfolio with a Bitcoin allocation.

And, you know, I'm not going to cheat and start, you know, looking at Bitcoin since 2008, 2010, when there were stupendous returns.

Let's look at the recent past, you know, the last 25 quarters.

So if we look at a portfolio, a typical 60-40 portfolio, and we add a 3% Bitcoin allocation to it, so 1.5% taken from each, over 25 quarters with quarterly rebalancing, what are the results?

So for information, we are using Bitcoin as a spot asset and the Bloomberg US Global Fund Aggregate Index and the US Large Cap Equity Index from Bloomberg.

So we're going to be using these as our benchmark assets.

So what are the results?

So you would be surprised to actually know that Bitcoin actually leads to superior results and lower volatility.

Everyone knows that Bitcoin actually is extremely volatile, but over a six year period, the effects of Bitcoin on a portfolio are undeniable.

It leads to extremely, extremely good results and reduces volatility over the long run.

So if we look at these results and these graphs over here, you will notice in the blue line is the Bitcoin enhanced portfolio.

So the 3% allocation to Bitcoin.

And you will see it massively outperforming just a typical 60-40 portfolio or a bond portfolio.

And even more interesting is Bitcoin was only 3% allocations to the portfolio, but the contribution to the total returns over 25 quarters was 19%.

You might wonder, you know, how is that possible with such a small allocation?

The reason why is because of Bitcoin's unique asymmetry and convexity in returns.

Bitcoin is volatile, but when it moves, it moves very quickly and very aggressively and very sharply to the right.

Bitcoin tends to outperform NASDAQ more than it underperforms and it gaps higher, more than it returns double of NASDAQ, typically more than it returns roughly about half of NASDAQ in terms of absolute returns.

So because of that unique return profile, it does actually lead to a huge boost to the portfolio and dampen volatility over time.

The ask over here is to actually get off zero and with urgency.

So after COVID-19, it is very clear that the debt, the COVID-19 government response was very debt-laden and wartime-like response and that has given a rise to its own regime shifts where debt and money supplies inflated like never before.

You know, a quarter of all the money that exists today in the last four years.

The world is increasingly polarized, leading to more extreme government policies.

institutions like BlackRock, Fidelity and VanEck have actually leaned into this and have realized that, OK, we need something that is, you know, an alternate, something that is outside the system.

And they have actually launched some of the most successful ETFs in the world at the start of this year, you know, by far.

And they continue to invest in this space.

More and more firms are accepting Bitcoin as collateral, increasing its capital efficiency.

There used to be a time where you could just buy Bitcoin and do nothing with it, but now you can use it as collateral and more and more firms are warming up to it.

Regulators have cleared the pathway for assets for Bitcoin with spot futures and options products trading on regulated venues.

So it's not in the shadows anymore, so to speak.

It is now here.

It is in front of you across regulated trading venues.

It's really, really good and it's actually matured immensely over the last decade.

And to be quite honest, I would encourage you to backtest Bitcoin over various different portfolios.

We've done the work over 50 different portfolios, spanning multiple asset classes, including commodities, gold, real estate.

And it clearly shows that even a 1% allocation to Bitcoin has superior risk adjusted returns over time.

And this is the recent past five or six years, not since 2008 or 2010.

So it's very, very mature today and has clearly shown its benefits in a portfolio.

Bitcoin still today, after 15 years out there, is in the initial stages of adoption, offering investors an outsized and favorable risk reward, in our opinion.

So the ask is to get off zero and do it with urgency, as we've seen this happen over and over again.

And the current situation obviously is

untenable over the next five to 10 years.

And Bitcoin provides an alternative to that.

With that, we do have a product, which is BTXX.

It is a SimpleSpot Bitcoin ETF product.

And it has the details over here and you can check out more on the DigitalX website at digitalx.com.

And with that, I will hand it over for questions.

Thank you for your presentation, Pradip.

So how do you view Bitcoin in a portfolio as a high beta tech stock gold or something else?

Yeah, so it's a very interesting question.

Historically, Bitcoin was considered as this vogue asset class that is something out there, couldn't put a pin on it.

But over time, it has become a real store of value.

So you could consider it like digital gold, but better for the new age.

Gold is typically bought, locked up in a vault and just kept there.

Bitcoin is digital, it's electronic, it's modern and more people are actually leaning into it.

It's divisible, transferable, portable, it has a lot of benefits.

And with its fixed supply and known inflation schedule, it is a far superior asset than gold.

So I would put it in its own category.

But if you were to compare it, I would say it is gold, but a superior form of gold.

and definitely a space in alternate asset portfolios.

And what catalysts do you see on the horizon for the broader digital asset sector?

Yeah, so digital assets have gone through a volatile period, right?

When it first started, it was a grey area, regulations weren't clear, there weren't enough service providers, stratified institutions were outright hostile.

So it went through a long journey and today,

it is very mature.

Today we've got some of the largest institutions in the world with ETA products in the market.

It is traded on regulated venues and it is doing it is more and more institutions are leaning into it.

So effectively, it is

Bitcoin is doing extremely, extremely well.

It has come into the foray.

And the catalysts in the future are getting even, even more better, specifically with the US elections coming up.

The US elections are going to drive a lot of the regulations in the next four years.

And it looks very favourable as more and more institutions lean into this asset class.

And that will be the biggest catalyst in the upcoming months.

Thanks, Pratik.

Thanks, Angelina.

And thanks for having me.