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Financial advisers are mulling a greater allocation to bitcoin in the face of an evolving macroeconomic environment and an expected shock to supply and demand of the asset, according to Bitwise executives.

Advisers interested in crypto have generally considered an allocation between 1% and 5% of a portfolio, Bitwise research analyst Ryan Rasmussen told Blockworks. It has historically been on the lower end of that range as equities and bonds offered appealing opportunities.

But professional asset allocators are looking to hedge against risks of rising inflation, economic uncertainty and geopolitical conflict, he added — noting that more are viewing it as a “chaos-resilient” asset.

“Currently, there are limited appealing alternatives to gold, but bitcoin shares similar qualities while offering the opportunity for advisers to add some alpha to their client’s portfolios,” Rasmussen said.

I spoke with several financial advisors this week. The conversation has shifted from potentially considering a 1% allocation to bitcoin to seriously considering a 5% allocation.

— Ryan Rasmussen (@RasterlyRock) October 26, 2023

Two-thirds of the “several” asset allocators Rasmussen chatted with — including independent financial pros and others part of large networks and registered investment advisers (RIAs) — are thinking about upping their current allocations to 5% or more, Rasmussen told Blockworks. Some are also considering jumping into the market for the first time.

Bitcoin’s price was roughly $34,000 at 12:30 pm ET on Friday — up about 15% from seven days ago.

Larry Fink, CEO of asset management giant, said earlier this month there is “pent-up interest” in crypto. He noted he believes crypto will play a “flight to quality” role alongside US Treasurys and gold.

Mike McGlone, a senior commodity strategist for Bloomberg Intelligence, said in an Oct. 25 research note that declining gold ETF holdings “may suggest room is being made for US-based spot bitcoin ETFs.” Bitcoin is still “quite risky” at 3.5 times the volatility of gold, he added.

Potential impact of possible BTC ETFs

Potential changes in certain adviser allocations to crypto comes after a January survey by VettaFi and Biwtise found that while 90% of various asset allocators get crypto-related questions from clients, just 15% allocate client assets to the space.

Roughly a third of respondents said the launch of a spot bitcoin ETF would make them more comfortable allocating to crypto.

Advisers are starting to realize the impact the potential launches of proposed spot bitcoin ETFs, as well as the upcoming decrease of per-block rewards for bitcoin miners, could have on the asset’s price, Rasmussen said.

Bitwise, BlackRock and others are currently seeking approval for funds that would hold bitcoin directly — a type of product the US Securities and Exchange Commission has never permitted to start trading. But some have grown more optimistic of such launches in the coming months after Grayscale Investments’ court win against the SEC and apparent ongoing dialogue with issuers and the regulator.

Read more: Is bitcoin’s ETF-fueled rally to $35K premature? Well, maybe

“Bitcoin is a commodity whose price is set by supply and demand,” Rasmussen said. “There’s going to be more demand next year when an ETF launches and the future supply is falling.”

An August Bitwise report stated that a 2.5% allocation to bitcoin would have boosted the three-year risk-adjusted return of a portfolio allocating 60% to stocks and 40% to bonds by 12 percentage points.

A 5% allocation can have a minimal impact on portfolio volatility and a significant impact on risk-adjusted returns, Rasmussen added.

“At the same time, a 5% allocation will not blow a portfolio up if crypto underperforms,” he said. “In other words, it’s all about position sizing relative to the opportunity, and advisers increasingly see bitcoin as a very compelling opportunity.”

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