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Bitcoin ETFs' Potential Impact on Portfolio Diversification Analyzed in Latest Report

K33 Research Report Forecasts Bitcoin ETFs' Influence on Investment Portfolios

Nov 22, 2023
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Analysts highlights potential portfolio benefits amidst SEC ETF decisions.

The approval of Bitcoin spot ETFs in the U.S. could revolutionize traditional investment strategies by providing easier access to Bitcoin exposure, thus reducing risk in the conventional 60/40 portfolio, a recent report by K33 Research suggests.

Analysts Vetle Lunde and Anders Helseth anticipate that diversification and risk-adjusted outperformance will be the primary strategies employed by ETF providers. They argue that since 2020, Bitcoin has demonstrated its value as a potent diversification tool. A traditional 60/40 portfolio (60% stocks, 40% bonds) with just 1% exposure to Bitcoin would have outperformed a similar portfolio without Bitcoin by 3.16%.

Despite the crypto market turmoil in 2022, Bitcoin exposure would have enhanced risk-adjusted returns in a traditional portfolio due to decreasing correlations and robust upside. However, the SEC’s recent decision to delay the approval of current Bitcoin spot ETF applications, including those from Hashdex and Franklin, has shifted focus to the next deadline on January 10.

The analysts suggest that this delay could slow momentum in the crypto markets as investors await significant news regarding the ETFs. Despite market volatility triggered by significant events such as BlackRock and Fidelity’s Ether spot ETF filings, Ark Invest’s Cathie Wood’s comments on a potential SEC denial of Grayscale’s Bitcoin spot application, and Binance and Changpeng Zhao’s criminal case settlement with the U.S. Department of Justice, Bitcoin has seen a modest increase of 2% over the past week.

Ether, on the other hand, continued its year-long underperformance against Bitcoin, falling by 2%. Binance’s BNB saw an increase of around 8% in the last week, potentially due to the implications of the settlement lifting a cloud over the industry and possibly aiding the approval of Bitcoin spot ETF proposals.

CME traders maintained their bullish sentiment towards Bitcoin last week, with futures premiums well above double digits and open interest at record highs. The analysts noted that the market signals indicate that CME traders are keen to carry their exposure into December, with the December vs November contango at a record 1.69%.

The narrative is further supported by Bitcoin-based ETP inflows, with 35-day net inflows now at 32,011 BTC ($1.17 billion). This coincides with increased communication between the SEC and Bitcoin spot EFT filers, bolstering the likelihood of approvals by January 10.

However, the analysts noted that crypto-native perpetual traders have adopted a more cautious approach, reducing the likelihood of liquidation squeezes in the near term. Open interest remained at an 18-month low over the past week, and funding rates returned to neutral levels, indicating a more balanced market sentiment.

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