Yesterday, the crypto company Bitwise published a very interesting analysis regarding the long-term forecasting on the price of Bitcoin.
Bitwise’s analysis and forecasting Bitcoin’s price
Many short-term Bitcoin price forecasts often circulate on the web, in many cases wrong because they are improvised.
Occasionally, however, serious ones about the long term are published, such as the recent one by Bitwise.
This is a real study on the role that investments in BTC could play within a traditional portfolio.
In particular, the analysis tries to answer the question of the influence Bitcoin had on the returns of a diversified portfolio with a 60/40 balance on stocks and bonds.
The analysis focuses on the past, but also aims to give insights into the future.
What the Bitwise analysts found is that, assuming a quarterly rebalancing, Bitcoin could have contributed positively to the returns of a diversified portfolio in 70% of the one-year periods, 94% of the two-year periods, and even 100% of the three-year periods from 2014 onwards.
These results are described as “remarkable.”
The overall period examined runs from January 2014 to June 2023, and includes multiple bullish and bearish market cycles, including the bear market of 2022.
In addition, various rebalancing strategies were explored, and the result was that historically, adding Bitcoin to a portfolio would strengthen them both in absolute terms for all holding periods of at least three years since 2014.
Bitcoin’s strengths
The study highlighted three key factors.
The first is precisely the time frame, because it was found that as holding periods increase beyond the historical record it becomes increasingly positive.
It is important not to forget that Bitcoin is a volatile asset, so in the short term it is extremely difficult to make predictions and results can be erratic. Over the long term, however, things change completely.
The second is the frequency of the rebalancing, because the addition of an asset with a significant degree of volatility within a portfolio makes rebalancing critical.
Quarterly rebalancing turned out to be the best strategy.
The third is position sizing, because large declines are an important factor for investors to consider when deciding to add BTC to their portfolio.
The study showed that the impact on Sharpe indices has generally started to stabilise at the 5% allocation level.
Furthermore, it was found that the impact of strong crashes increases rapidly from 5% upwards, which could make it uncomfortable for investors to allocate capital to BTC above this level.
The long-term forecasting
The study concludes with these words:
“Although past performance is no guarantee of future results, the empirical evidence from this study underscores a salient observation: For a traditional portfolio of stocks and bonds, bitcoin has historically been a very effective tool to enhance risk-adjusted returns.”
This is not actually a true prediction, but what emerges overall from the study is that, not knowing for sure what will happen, the past suggests that allocating around 5% of capital to BTC within a classic 60/40 portfolio improves its long-term return.
Not only is this not really a prediction, it is also not meant to be investment advice, as it merely analyses the past. However, this is the only past there is so far, so unless there are changes it can be expected to have some chance of repeating itself.
Bitwise and the Bitcoin prediction
Bitwise is a company specialising in crypto indices.
So it is not a company that comes from traditional finance, but a crypto company in its own right, even though it deals with financial indices.
It also manages crypto funds for professional investors, such as its Bitwise 10 Crypto Index Fund (ticker BITW, CUSIP 091749101, ISIN US0917491013) with $445 million of AUM and Coinbase Custody as custodian.
One cannot therefore say that the above analysis is an independent one, but at least it was prepared by professionals in the field who are certainly not improvisers.
Moreover, it is an analysis based on public and reliable data, so in fact anyone could verify its correctness.
Finally, the same analysts who produced the study explicitly warn that these data, which only concern the past, are not sufficient to make certain forecasts for the future, admitting that things in the future could also be different.
What emerges from this study confirms two hypotheses that have been circulating in the crypto world for years now, but which until now had never received such solid and timely confirmation.
The first concerns the differences in performance between the short and long term, in the case of simple holding: Bitcoin has so far performed well mainly in the long term, while in the short term it can sometimes also produce substantial losses.
The second concerns the share of capital that can be allocated to BTC, which many have always argued is best kept below two-digit percentages.