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Analysts' Insights

Analysts' Insights

$5 Trillion AUM Investment Advisors Contemplate 10% Bitcoin Allocation

1) The market is pricing in a roughly 75% chance that a Grayscale Bitcoin Trust (GBTC) will receive SEC approval for an ETF conversion. The discount in net-asset-value has narrowed from -45% at the end of 2022 to just -19%. Last night, the appointed judge in the Grayscale – SEC lawsuit clarified that the SEC has to revisit this case, marking a substantial step closer to an ETF approval, though not constituting legal endorsement.

2) Over the next few days, it’s expected that there will be more Bitcoin ETF announcements. Regardless of the outcome, a potential approval will support Bitcoin (BTC) prices. This is why we expected Bitcoin prices to remain above the $25,000 level when the Blackrock application was filed. We also encouraged our institutional investors to accumulate Bitcoin sub-$26,000 (see link to Matrix on Target from last week, and link to yesterday’s Matrixport Daily Insights).

3) Even on June 15 2023, when Blackrock filed for the US-listed physical Bitcoin ETF, the discount was at -43%. Since then, Bitcoin prices have rallied +8%, while GBTC increased by +53%. Since the beginning of the year, Bitcoin is up +67% while GBTC has surged by +148%.

4) In our 2023 outlook report (link to Matrix on Target on December 9 2022), we highlighted that GBTC would offer a potential return of +63% as “there would be $3.5bn up for grabs” – unlocked value enticing for a large buyer.

5) The market capitalization of the leading Gold ETF (SPDR Gold) is $58bn. Therefore, we can envision the Blackrock Bitcoin ETF accumulating $10bn within three months of launch, and $20bn within six months. Half of that $20bn would most likely be new inflows from U.S. retail investors, pension and endowment funds; with the other half coming from less reliable crypto exchanges.

6) This Blackrock iShares “commodity” Bitcoin ETF will attract an allocation of $20-50bn over time, a calculated assumption given that Gold ETFs alone hold $100bn. This form of soft pressure or indirect influence, would force those exchanges to enforce stronger compliance oversight, otherwise, it’s likely that they could lose a vast number of their customers to more regulatory compliant exchanges that cater to institutional investors.

7) How Bitcoin ETFs would fit into asset allocation models needs to be better understood. In the U.S., influential Registered Investment Advisors (RIAs) could include those ETFs in their asset allocation portfolios. The number of RIAs has been increasing annually, with approximately 14,800 registered investment advisors employed in the United States in 2021, managing over $5 trillion (link to Matrix on Target on July 13).

8) Pension Funds, University Endowment Funds, ultra-high-worth individuals, and Multi-Family Offices tend to run well-balanced portfolios across all asset classes. Bitcoin will play a larger role in those asset allocation strategies.

9) Based on our Black-Litterman asset allocation model, including Bitcoin in a portfolio would incorporate the expected returns and make the volatility-targeting portfolio more attractive. The Black-Litterman asset allocation model allows for incorporating views (tactical), differentiating it from the classical Markowitz asset allocation model (strategic).

10) The optimised, well-diversified (tactical) portfolio would allocate 21% to global equities, 42% to global fixed income (bonds, credit, loans, etc.), and 37% to alternatives — including 10.6% to Bitcoin.

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