This year marks a significant moment for Bitcoin, capturing the attention of billionaire hedge fund managers. Recent 13F filings with the Securities and Exchange Commission reveal that more than half of the top 25 U.S. hedge funds, ranked by assets under management, now hold Bitcoin.
This naturally raises the question: What has made Bitcoin so attractive to billionaire investors in 2024? Let’s delve deeper into the reasons behind this trend.
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The Simplicity and Accessibility of Bitcoin ETFs
The narrative really gains momentum with the introduction of new spot Bitcoin ETFs in January. Prior to this, while billionaire hedge fund managers could certainly purchase Bitcoin, the process was cumbersome and lacked liquidity. They had to establish digital wallets, implement new risk management protocols, and buy cryptocurrency directly from exchanges.
The landscape shifted dramatically in January 2024 with the advent of these new spot Bitcoin ETFs, which enabled hedge funds to acquire Bitcoin more easily and conveniently than ever before. The SEC’s endorsement of these ETFs added an additional layer of legitimacy. Essentially, purchasing Bitcoin became as straightforward as acquiring a tech stock.
Potential for Significant Returns
A crucial consideration in opting to buy Bitcoin is its potential for long-term gains. Over the past decade, Bitcoin has been the world’s top-performing asset, a fact not overlooked by billionaire hedge fund managers. From 2011 to 2021, Bitcoin achieved annualized returns of 230%, a stark contrast to the 20% annual returns of tech stocks. Thus, Bitcoin presents an alluring opportunity to enhance portfolio returns.
Moreover, Bitcoin’s future growth potential remains substantial. Price forecasts for Bitcoin are often staggering. Predictions of Bitcoin reaching $1 million per coin were once seen as sensational, yet they now seem outdated. Cathie Wood of Ark Invest anticipates Bitcoin hitting $3.8 million per coin by 2030, while Michael Saylor of MicroStrategy Inc. envisions a future value of $13 million.
Safeguarding Against Downside Risks
Billionaire investors also appreciate Bitcoin’s potential for downside risk protection. Although initially counterintuitive given crypto’s reputation for riskiness and volatility, Bitcoin shares similarities with gold, such as its limited supply and role as a long-term store of value. This has earned Bitcoin the nickname “digital gold.”
Similar to purchasing gold for protection against market corrections or crashes, Bitcoin can serve as a hedge against economic, political, and geopolitical risks. Billionaire hedge fund manager Paul Tudor Jones has recommended owning both gold and Bitcoin for risk hedging, and billionaire investor Stanley Druckenmiller has even suggested Bitcoin might surpass gold in this regard.
Benefits of Portfolio Diversification
A core principle of Modern Portfolio Theory, which aims to maximize expected returns for a given risk level, is that including a risky asset can actually reduce portfolio risk. Thus, adding a risky asset like Bitcoin doesn’t necessarily increase overall risk. Since Bitcoin has historically been uncorrelated with major asset classes, incorporating it can potentially lower overall risk. Simply put, Bitcoin can provide stability when other market assets fluctuate.
So, how much Bitcoin should one include to optimize a portfolio? Opinions vary. At the start of this year, Cathie Wood of Ark Invest analyzed data and concluded that an optimal risk-adjusted portfolio would allocate nearly 20% to Bitcoin, significantly more than the standard 1% allocation.
In reality, however, the average Bitcoin allocation among leading billionaire investors is about 0.2%. Even the most daring billionaire-run hedge funds limit their Bitcoin exposure to just 1% of their assets under management. For instance, if managing $100 million (the threshold for 13F filing), they might hold only $1 million in Bitcoin.
Investment Insights from Billionaires
Combining all these insights, individual investors can glean several lessons. For instance, opting for a Bitcoin ETF could be more advantageous than buying Bitcoin directly from a cryptocurrency exchange. It’s also important to consider factors beyond future upside potential, such as one’s tolerance for the cryptocurrency’s volatility.
While it’s enticing to discuss $1 million price targets, equally attractive are the benefits of downside risk protection and portfolio diversification. It is this combination that has made Bitcoin so appealing to billionaire investors.
