We’ve been hearing a lot of questions from our clients about crypto portfolio allocations lately, so we wanted to refresh our earlier thought leadership on the topic. Below, we explore the potential value of bitcoin, its suitability as a currency, and the impact of recent developments, including the Trump administration’s proposed strategic bitcoin reserve.
What’s Bernstein Private Wealth Management’s take on adding crypto to a portfolio?
We view the crypto asset class as akin to early-stage venture capital, with similar principles:
- Minimal Allocation: Invest only a small portion of your assets in crypto, if at all. Given the high risks, only use money you can afford to lose entirely. If the potential for a total loss makes you uneasy, steer clear of a crypto portfolio allocation.
- Diversification: Inside of that allocation, diversify your holdings. As unproven technology, it’s still unclear which protocols will prevail in the long run. (Historical examples, like Betamax, show that the best technology doesn’t always win.)
- Long-Term Focus: While there may be short-term trading opportunities, most investors lack the edge to capitalize on them. Instead, focus on long-term investments based on the fundamental value of the protocols. Assess the potential societal value of the protocol and the network’s ability to capture that value. This is particularly challenging, as seen with Ethereum, where future token supply and value per token remain uncertain.
How is Bernstein’s crypto thesis playing out?
Having stayed on top of developments since we initially outlined our principles for crypto investors, we see no reason to change those guidelines.
More specifically, in 2022, we highlighted the need for greater regulatory clarity and traditional finance (“tradfi”) rails for cryptoasset exposure before adding crypto to a portfolio. We laid out a roadmap involving the SEC’s approval of the first spot bitcoin ETFs, followed by competitors, the launch of spot ETFs for ether and other tokens, and a diversified index in spot ETF form. Today, we’re around halfway through those checkpoints (Display). With the Trump administration focused on regulatory clarity and greenlighting crypto’s expansion, we expect to meet the rest of the milestones in the coming years.
However, even as the gap between investors and the crypto ecosystem narrows, fundamental issues of technology development and usage persist. As we also laid out in 2022, we continue to look for improved user interfaces within the crypto ecosystem, proof that decentralized solutions are superior to centralized ones for various use cases, and the establishment of competitive advantages for various crypto protocols and operators. These challenges will take time to address. Over the next few years, we think those issues must come into focus; without solutions, crypto will remain a technology in search of a problem.
What material changes—for better or worse—have impacted our view of a crypto portfolio allocation?
The most notable, unexpected development in the crypto space in recent years has been the Trump campaign’s expressed intent to establish a strategic bitcoin reserve (Display).
For what it’s worth, we think this would likely be a policy mistake, similar to the US increasing its gold reserves. There isn't a strong economic justification for spending $100 billion over several years to buy bitcoin, especially given the already problematic national debt. While accounting tricks, like marking up the value of gold held by the US government, can be used, they don't alter the fundamental economics. Just as accounting maneuvers don’t fix poor operational and capital allocation decisions for companies, they don’t change the economic reality for nations.
A strategic bitcoin reserve would only make sense if the US government could operate like an activist stock investor—quietly buying a stake before the market catches on and then benefiting from the subsequent price appreciation. But the government would need to pass laws and appropriate funds for these purchases, implementing a multi-year buying plan that could easily be anticipated and front-run by the market.
Policy questions aside, we see a reasonable chance it could pass due to a vocal minority in the administration pushing for it, along with limited opposition. Yet, political hurdles remain, as something akin to Senator Cynthia Lummis’ BITCOIN Act would need to pass both the House and Senate.
Why flag this development? Because if bitcoin evolves into digital gold, this move could roughly double its total addressable market, providing a new framework for comparable analysis, as we’ll discuss below.
Would bitcoin make a good currency?
No.
Bitcoin would actually be a terrible currency due to the very quality which drew people to it in the first place—a fixed supply. People prefer stable currencies, not ones that rapidly appreciate or depreciate. Demand for currencies can fluctuate, and credible currencies allow for supply adjustments to prevent large value spikes and the harmful effects of both high inflation and high deflation.
Bitcoin’s fixed supply makes it inherently volatile, unlike fiat currencies. And as long as more stable fiat currencies exist, people will prefer to hold liquid assets in those currencies, price goods and services in those currencies, and spend money from those currencies. With its current volatility, pricing goods or services in bitcoin would be like pricing them in META or TSLA stock (Display).
Bitcoin is designed to be a deflationary asset, similar to gold, which encourages hoarding rather than spending. Even our most crypto-optimistic clients don’t categorize their crypto holdings with their dollars, euros, money market funds, or fixed income assets. Put simply, people don’t think of bitcoin as cash—and that’s a big barrier to it ever becoming cash.
How does Bernstein think about the potential value of bitcoin?
We’ve discussed what bitcoin isn’t, so how do we think about it?
We see bitcoin as a venture capital–like bet on it being treated like gold in the future—not as money or even an inflation hedge, but as an ultimate disaster hedge and risk-off asset. People buy gold when they’re worried the world will collapse.
Yet currently, bitcoin is one of the ultimate risk-on assets. For it to become a risk-off asset would require a complete 180-degree turn. Those buying it today with a long-term view are effectively wagering, like a VC, that it will be able to make this transition.
Viewing bitcoin as digital gold helps us estimate its potential value. More than half of the world’s gold is used for jewelry, industry, or other purposes. Only 22% is held by private investors and 17% by central banks and governments. This breakdown is important and oft-abused (Display).
In our original white paper, we explained the logic of treating bitcoin as digital gold, using the stockpile of gold held by private investors as a comparable asset. We split that value to some degree between bitcoin and gold at “maturity,” and discounted it back to the present at a venture capital-like rate due to the risk that investors may not eventually treat it as digital gold.
Earlier in this blog, we flagged the heightened potential of a US bitcoin strategic reserve under the Trump administration. This could expand comparable asset pool to further include gold held by central banks, nearly doubling bitcoin’s potential value.
How large are our two most relevant comps from the gold market? Remember that gold has risen almost 40% in the last year and a half, driven initially by Chinese government purchases in 2023 (Display).
At its current price of around $2,750, the total stock of gold held for investment is $4.6 trillion. Including gold held by central banks brings the total to $8.2 trillion. By comparison, bitcoin has recently traded at a $2.1 trillion total value.
How you weight those two potential “addressable markets” for bitcoin may vary, along with the timeline for its transition to a risk-off asset. Since it’s a risky asset and its maturation point is in the future, its future value needs to be discounted back to the present at a high rate, similar to a venture investment. This framework remains our best approach to estimating bitcoin’s long-term fair market price.
Proponents of bitcoin as digital gold often make two “mistakes”I:
- Comparing it to the entire stockpile of gold, including the jewelry and industrial portions
- Assuming bitcoin will completely displace gold and capture 100% of its historical value (implicitly leaving gold with zero value or doubling their combined value to investors)
What’s more, bitcoin bulls sometimes use an even larger peer group for valuation—comparing it to the supply of US dollars or other currencies. This leads to valuations in the tens of trillions of dollars. However, as we’ve detailed, bitcoin’s characteristics make it better suited to being a hoarding asset like gold rather than a currency for spending.
- Christopher Brigham
- Senior Research Analyst—Investment Strategy Group
i We suspect these mistakes may be made in bad faith, rather than by accident.