[Xangle Digest]

※ This article contains content originally published by a third party on July 13, 2023. Please refer to the bottom of the article for the copyright notice regarding this content. 

※ This is a summary of the weekly research published by Matrixport on July 13th.

Executive Summary

Once the U.S. Securities and Exchange Commission (SEC) officially approves U.S.-listed Bitcoin ETFs, the influential Registered Investment Advisors (RIAs) will be able to 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.

Pension Funds, University Endowment Funds, Ultra-High Net Worth individuals, and Multi-Family Offices tend to run well-balanced portfolios across all asset classes, and Bitcoin will play a larger role in those asset allocation strategies.

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 the incorporation of views (tactical), differentiating it from the classical Markowitz asset allocation model (strategic).

This Black-Litterman asset allocation model sacrifices an allocation away from real estate - which might suffer from higher financing costs and unattractive cap rates (Capitalisation rate is a real estate valuation measure used to compare different real estate investments) - and instead allocates it to alternatives - such as private equity and hedge funds - and importantly, also to Bitcoin - if a compliant product were available. This is why an SEC registered Bitcoin ETF could become such a powerful driver for asset allocation decisions.

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. In particular, U.S. endowment funds have actively allocated towards ‘alternatives’, such as private equity. While the Markowitz (strategic asset allocation) portfolio suggests an exposure to 19.5% to alternatives (including 0.58% in Bitcoin), our Black-Litterman (tactical) model suggests a higher allocation of 37%. This portfolio is optimised for a target portfolio volatility of 15%. We created various model portfolios under various assumptions but the conclusion that Bitcoin can add significant value for well-diversified portfolios remains constant.

Source: Matrixport Technologies
Exhibit 1: Suggested Asset Allocation Weights based on BTC > Bonds by 10% per annum

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