Category: Cryptocurrency

Bitcoin ETF trades top $4.6 billion in ground-breaking opening day

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The first US ETFs that directly hold Bitcoin got off to a strong start, with billions of dollars changing hands in a historical first day of trading for the long-sought investment vehicles.

Over $4.6 billion worth of shares traded between the almost a dozen US spot Bitcoin exchange-traded funds on Thursday. The Grayscale Bitcoin Trust, which converted into an ETF, saw about $2.3 billion in volume, according to data compiled by Bloomberg. Meantime, BlackRock’s iShares Bitcoin Trust—IBIT— saw over $1 billion change hands.

“This is definitely ground-breaking,” said Athanasios Psarofagis, an ETF analyst at Bloomberg Intelligence. “There was no doubt demand would be strong for these ETFs, but the numbers across the board are impressive.”

Still, it’s hard to compare Thursday’s activity to any other day in ETF history. Typically, only one fund that tracks a new asset class begins trading on a single day. It’s unprecedented to see over 10 nearly identical funds all begin at once. But even singling in on one ETF indicates the sheer magnitude of trading.

The Grayscale Bitcoin Trust was the most heavily traded ETF debut on record. To be sure, the product has existed in its trust structure since 2013, and had a nearly $27 billion headstart in asset size.

Trading volume doesn’t indicate buying or selling or investor inflows. Because of the way the funds settle trades, net flows into or out of the products probably won’t be known until at least Friday.

When the initial Bitcoin futures fund began trading in 2021, it saw turnover of almost $1 billion during the entire first day. At the time, the futures fund debut was the second-most heavily traded fund on record.

Psarofagis added a caveat that much of the demand may be from so called “seed” money that is pre-arranged by the fund issuers. Signs of more organic demand, like from retail investors or financial advisors, may come later on as more broker-dealers list the funds on their platforms.

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Bitcoin-spot ETFs authorised by US SEC in Crypto’s big breakthrough

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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US regulators for the first time approved exchange-traded funds that invest directly in Bitcoin, a move heralded as a landmark event for the roughly $1.7 trillion digital-asset sector that will broaden access to the largest cryptocurrency on Wall Street and beyond.

The Securities and Exchange Commission, whose three-part mandate includes investor protection, authorized funds from industry heavyweights BlackRock, Invesco and Fidelity to smaller competitors including Valkyrie to begin trading Thursday.

The approvals also mark a rare capitulation by the SEC following opposition that lasted for more than a decade, ever since Tyler and Cameron Winklevoss first proposed a Bitcoin ETF in 2013. BlackRock Inc.’s surprise application last June, followed by an appeals court ruling that called the denial of a different application “arbitrary and capricious,” triggered a blistering rally in the cryptocurrency as speculation that US regulators would finally give their blessing to the structure.

“While we approved the listing and trading of certain spot Bitcoin ETP shares today, we did not approve or endorse Bitcoin,” SEC Chair Gary Gensler said in a statement. “Investors should remain cautious about the myriad risks associated with Bitcoin and products whose value is tied to crypto.”

At the crux of the SEC’s previous rulings against a spot ETF was the argument that no regulated exchange was able to adequately monitor Bitcoin trading in a way that would reliably detect fraud and manipulation. That contention was opposed by Ark, among others, which provided data showing a high correlation between cash trading and the futures contracts that trade on CME Group’s platform.

In reviewing the latest set of proposals, the SEC said it examined the correlation between spot and futures trading at a variety of time intervals and concluded prices moved in such a way that irregularities on exchanges such as Kraken and Coinbase were likely to show up in the futures.

“Because the CME’s surveillance can assist in detecting those impacts on CME bitcoin futures prices, the exchanges’ comprehensive surveillance-sharing agreement with the CME — a U.S. regulated market whose bitcoin futures market is consistently highly correlated to spot bitcoin, albeit not of “significant size” related to spot bitcoin — can be reasonably expected to assist in surveilling for fraudulent and manipulative acts and practices in the specific context of the proposals,” the order said.

The decision comes a day after a false post on the SEC’s X account claimed that the agency had approved the ETFs. The regulator subsequently said that the account had been compromised, causing the price of Bitcoin to fluctuate widely.

Bitcoin was little changed at about $46,300 following the approvals. The original cryptocurrency, which sank 64% in 2022, more than doubled in 2023 in large part because of speculation that the SEC would eventually approve ETFs that will allow investors to get exposure to the token in their traditional brokerage accounts instead of one of the crypto-native startups that have come under increasing government scrutiny following a series of sector scandals and bankruptcies.

“The approval means that both retail and institutional investors now have the ability to diversify their portfolio with crypto exposure without worrying about the complicated issues of custody,” said Campbell Harvey, finance professor at Duke University. “The ETF makes it easy to add to your portfolio.”

Crypto proponents have for years argued that a so-called spot fund that invests directly in Bitcoin would be beneficial to investors and would help bring the industry closer to the more highly regulated world of traditional finance. It also suggests a sort of milestone of maturity for the relatively nascent industry, where skirmishes with regulators came to a climax after the collapse of Sam Bankman-Fried’s FTX empire highlighted risks lurking in the industry.

The landmark decision comes after Grayscale Investments won a key victory over the SEC. A federal appeals court had overturned the rejection of Grayscale’s application to convert its Bitcoin trust into an ETF. The court called the denial “arbitrary and capricious” because the commission failed to explain its different treatment of similar products. ETFs that hold Bitcoin futures were approved in 2021.

The SEC’s loss to Grayscale was one of the reasons why the SEC approved the applications, Gensler said in Tuesday’s statement.

“Based on these circumstances and those discussed more fully in the approval order, I feel the most sustainable path forward is to approve the listing and trading of these spot Bitcoin ETP shares,” Gensler said.

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Bitcoin prices swing wildly after debunked post claimed ETFs won approval

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Bitcoin dropped to around $45,000 before recovering losses late Tuesday after a debunked post on the X social-media site falsely claimed that the US Securities and Exchange Commission had approved the issuance of ETFs holding the cryptocurrency.

The agency said shortly afterward that it had not yet granted approval of spot-Bitcoin exchange-traded funds, and that the post that appeared on the regulator’s official X account was untrue. Market participants were caught off guard by the false statement, with the SEC widely expected by analysts to announce a decision Wednesday.

“That was not on my bingo card for today,” said Ophelia Snyder, co-founder and president of 21Shares, which is seeking to offer a Bitcoin ETF with ARK Investments. “I don’t think it will affect the process or what comes next. There’s no way after 10 years of work this could wrap up without any last minute drama.”

The ARK 21 Shares application must be addressed by the SEC by the end of Wednesday. Analysts expect the agency to approve several applications at that time, following a slew of last-minute adjustments to official offering statements this week.

The largest cryptocurrency recently traded at around $45,886. It had surged to as a 21-month high more than $47,000 on Tuesday as optimism grew that approval of the the long-sought ETFs was imminent.

“The entire spot Bitcoin ETF saga has been highly unusual from the beginning and so the tweet made sense in that light,” said Nate Geraci, president of The ETF Store, an advisory firm. “Just add this to the long list of surprising plot twists and turns in the 10-plus year effort to bring a spot Bitcoin ETF to market.”

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US market regulator’s “X” account compromised to falsely say Bitcoin gets ETF approval

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The US Securities and Exchange Commission said it had not yet granted approval of spot-Bitcoin exchange-traded funds, and that a post that appeared on the regulator’s official “X” account was untrue.

The post, which included a fake comment purporting to be from SEC Chair Gary Gensler, briefly fueled a jump in the price of Bitcoin. Traders have been speculating for weeks that the agency could approve several of the products as soon as Wednesday.

Gensler said from his own X account that the regulator’s account had been “compromised,” an unauthorized statement was posted and that the agency hadn’t taken action.

The @SECGov twitter account was compromised, and an unauthorized tweet was posted. The SEC has not approved the listing and trading of spot bitcoin exchange-traded products.

— Gary Gensler (@GaryGensler) January 9, 2024

About a dozen companies have applied to list ETFs backed by Bitcoin in the US. The SEC has until January 10 to take action on at least one of those applications, and crypto insiders have speculated the regulator will use that date to announce a slew of decisions at once.

There are two technical requirements that must be fulfilled before a spot-backed Bitcoin ETF can start trading. First, the SEC must sign off on so-called 19b-4 filings by the exchanges that would list the ETFs. Second, the regulator must approve the relevant S-1 forms, which are the registration applications from the would-be issuers — a list that includes BlackRock and Fidelity.

The SEC is planning to vote on the exchanges’ filings, the 19b-4s, this week, Bloomberg News has reported. The regulator may or may not take action on the issuers’ applications, the S-1s, around the same time. If the SEC grants both sets of required approvals, the ETFs could start trading as soon as the next business day.

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Bitcoin rally cools in countdown to US Spot ETF decision by SEC

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Bitcoin consolidated after a surge past $47,000 on bets that the US is poised to approve the launch of the nation’s first exchange-traded funds investing directly in the world’s largest digital asset.

The token dipped to $46,770 as of 8:56 AM in Singapore on Tuesday after a 6.5% jump on Monday in the US. Its new year climb now stands at 10%, contrasting with drops over the same period in stocks and gold. The crypto market expects a green light for US spot Bitcoin ETFs by a January 10 deadline.

Prospective issuers such as BlackRock Inc., Fidelity Investments and Ark Investment Management updated paperwork with the Securities and Exchange Commission, and the regulator has until Wednesday to take action on at least one of the applications. Speculators are wagering that the agency will announce a slew of decisions at once to avoid handing out a first-mover advantage.

If the funds are approved, the next question is how much money they will woo. Bitcoin is up 172% in the past 12 months in an indication that traders anticipate greater adoption of the digital token by mainstream investors via the ETFs.

“Participants seem to be coming around to thinking that the initial flows will actually exceed expectations,” said Kyle Doane, a trader at Arca.

Applicants amended forms on Monday in the US in a final push to offer spot Bitcoin ETF products more than a decade after the first attempt.

SEC Chair Gary Gensler has repeatedly argued that crypto is rife with fraud and misconduct. The agency cracked down on the sector following a 2022 market rout and collapses such as the bankruptcy of Sam Bankman-Fried’s FTX exchange.

But the SEC last year lost a key legal fight against crypto asset manager Grayscale Investments LLC, spurring speculation that the regulator will have to acquiesce to the spot ETFs.

Critics contend that the products pose a risk for investors given that digital assets are notorious for volatility and attracting illicit activity.

“What’s going to happen, unfortunately, is lots and lots of Americans in our view, are going to get hurt financially,” said Dennis Kelleher, chief executive officer of financial reform nonprofit Better Markets.

The advance in Bitcoin has lifted the digital-asset market more broadly, bolstering smaller tokens like Solana and Cardano. US crypto-linked stocks mostly rose on Monday, setting up a tailwind for Asian peers such as Japan’s Monex Group and Woori Technology Investment Co. in South Korea.

Some crypto watchers wonder whether Bitcoin is ripe for a pullback if and when SEC approval finally lands, since speculators may decide to bank a slice of profits from the token’s rally.

There are “no signs” of a so-called sell-the-news event just yet, Chris Weston, head of research at Pepperstone Group Ltd., wrote in a note. Based on chart patterns, the $51,000 level is a possible target before any such pullback, according to Tony Sycamore, a market analyst at IG Australia Pty.

Looking past short-term price gyrations, “the main result of Bitcoin spot ETF approval will be the marketing machine behind greater Bitcoin awareness, powered by some of the largest names in traditional finance,” wrote Noelle Acheson, author of the Crypto Is Macro Now newsletter.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Bitcoin rises to highest level in 21 months on ETF approval hope

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Bitcoin surpassed $45,000 for the first time in nearly two years as anticipation of an approval of an exchange-traded fund investing directly in the biggest token intensified.

The cryptocurrency jumped as much as 4% to its highest level since April 6, 2022 and traded at $44,844 as of 9:45am. Singapore time. Other tokens also advanced with Ether, the second biggest, rising as much as 2.6%.

Bitcoin has risen over 15% since the start of December as a Jan. 10 deadline for the US Securities and Exchange Commission to give its blessing for a spot ETF Bitcoin draws closer.

There’s a fear of missing out among some traders in the US and Europe ahead of the looming approval and investors have started “buying on January 1, first thing New Year’s morning,” said Hayden Hughes, co-founder of social-trading platform Alpha Impact.

Traders are expecting Bitcoin to touch $50,000 soon, riding on the spot ETF optimism.

Bitcoin’s resurgence in the last 12 months has also been driven by a broader risk-on sentiment fueled by expectations of declining interest rates in the US. The rally has partially repaired the damage from a precipitous 2022 crash that reverberated around the crypto industry. The token remains below its 2021 pandemic-era record of almost $69,000.

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Cryptos bounce back in 2023: What’s in store for 2024?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Cryptocurrencies witnessed a significant recovery in 2023 following the challenging ‘crypto winter’ of 2022, which was marked by widespread sell-offs, layoffs, contagion concerns, and frauds globally. 2023 also saw India implementing a 30% tax on crypto profits and a 1% tax deduction at source (TDS) on all transactions

In 2023, Bitcoin – the most popular and expensive crypto rebounded from a low of almost $16,000 hitting a high of $44,500, although it failed to reach its all-time high of $68,990.

Ethereum, the second most traded crypto, also made a strong comeback to $2,400 from a low of $1,151.

The biggest surge was seen in Solana that jumped to nearly $80 from a low of $8. Solana also is way off its all-time high of $259.

Cardano, Polygon, Dogecoin, Avalanche were among other popular cryptos that made a strong comeback in 2023.

The UK Financial Conduct Authority estimated that there were nearly 20,000 different cryptocurrencies by the start of 2023, although many of them were no longer traded and would never grow to a significant size.

By November 2023, it was estimated that around 8,800 cryptocurrencies were in existence. The top few gainers saw 80% to 500% return during the year.

Even as 2023 had its fair share of negative developments such as the fall of FTX and Binance, the global markets held and grew their presence.

As per an analysis in September 2023, India despite its regulatory and tax environment, has emerged as one of the top crypto markets by volume.

Total India trade volumes in the last year until October 2023 was around $34 billion. Of this, India’s offshore trading volume is $32 billion. So nearly 93% of total India volume is from offshore exchanges, which do not have registered offices in India or comply with local regulations from July 2022 to October 2023.

An estimated 5.2 million Indian users have moved to offshore platforms since the introduction of TDS.

Now, as 2024 approaches, investors are wondering if these cryptos can build on the gains from the previous year.

So the things to watch out for are if the spot Bitcoin ETF gets approval in this coming year. Also, the Bitcoin halving is expected to happen in April 2024. Ethereum updates are also keenly awaited and so are the rate cuts from global central banks.

But the volatility and uncertainty persists with Wall Street banks and brokerages projecting Bitcoin prices in 2024 at anywhere between $30,000 and $1,25,000.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Sam Bankman-Fried will not face a second trial

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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U.S. prosecutors said they do not plan to conduct a second trial against Sam Bankman-Fried, who was convicted last month of stealing from customers of his now-bankrupt FTX cryptocurrency exchange.

In a letter filed on Friday night in federal court in Manhattan, prosecutors said the ”strong public interest” in a prompt resolution of their case against the 31-year-old former billionaire outweighed the benefits of a second trial.

Prosecutors said that interest ”weighs particularly heavily here,” given that Bankman-Fried’s scheduled March 28, 2024, sentencing will likely include orders of forfeiture and restitution for victims of his crimes.

Jurors on Nov. 2 convicted Bankman-Fried on all seven fraud and conspiracy counts he faced. Prosecutors had accused him of looting $8 billion from FTX customers out of sheer greed.

Lawyers for Bankman-Fried declined to comment.

Bankman-Fried had faced six additional charges that had been severed from his first trial, including campaign finance violations, conspiracy to commit bribery, and conspiracy to operate an unlicensed money transmitting business.

He had been extradited in December 2022 from the Bahamas, where FTX was based, to face the seven earlier charges.

The Bahamas has yet to grant its consent for a trial on the remaining charges, however, leaving the timetable uncertain, prosecutors said.

Bankman-Fried’s verdict came nearly one year after FTX filed for bankruptcy, erasing his once-$26 billion personal fortune in one of the fastest collapses of a major participant in U.S. financial markets.

Bankman-Fried could face decades in prison when he is sentenced by U.S. District Judge Lewis Kaplan in Manhattan.

Prosecutors said much of the evidence that could be offered at a second trial was already presented at the first trial.

They also said a second trial would not affect how much time Bankman-Fried could face in prison under recommended federal guidelines, because Kaplan could consider all of Bankman-Fried’s conduct when sentencing him for the counts on which he was convicted.

Bankman-Fried is expected to appeal his conviction.

He testified at trial that he made mistakes running FTX, including by not creating a team to oversee risk management, but did not steal customer funds.

Bankman-Fried also said he thought the borrowing of money from FTX by his crypto-focused hedge fund Alameda Research was permissible, and that he did not realize how precarious their finances had become until shortly before both collapsed.

The Massachusetts Institute of Technology graduate has been jailed since August, when Kaplan revoked his bail after concluding that Bankman-Fried had likely tampered with prospective trial witnesses.

The case is U.S. v. Bankman-Fried, U.S. District Court, Southern District of New York, No. 22-cr-00673.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Bitcoin’s 160% rebound in 2023 is a gamble on ETF demand shock

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The sense of doom that gripped crypto markets at the end of 2022 following a $1.5 trillion wipeout has 12 months later given way to a very different sentiment: avarice.

Bitcoin stormed back with a more than 160% advance this year that added some $530 billion to its market capitalization.

In its wake, myriad smaller tokens ranging from Sam Bankman-Fried-backed Solana to dog- and frog-themed memecoins took off as investors embraced risk again. An investor who bought $1,00,000 of Solana at the start of 2023 would now be sitting on a more than $8,00,000 gain.

Underpinning much of the bonanza is optimism that US regulators will soon give their first blessing for an exchange-traded fund (ETF) that invests directly in Bitcoin. Investors will find out by January 10 if that bet, which crypto bulls consider a near-certain winner, pans out.

“The approval of the spot ETFs is going to be a major catalyst, it’s going to definitely drive a demand shock” as mainstream investors currently lack a “high bandwidth, compliant” investment channel for the token, Michael Saylor, co-founder of Bitcoin holder MicroStrategy Inc., said on Bloomberg Television.

Digital-asset markets still have plenty of detractors who argue cryptocurrencies are fundamentally worthless and a haven for criminals. Binance, the largest exchange, in November agreed to pay a $4.3 billion fine for a range of violations and Chief Executive Officer Changpeng Zhao was forced to step down. Bankman-Fried has been jailed for fraud at FTX, and liquidity has yet to fully recover from the collapse of his empire.

Bitcoin’s rally this year topped stocks and gold. Supporters say a quadrennial event due in 2024 known as the halving — or halvening — will curb supply growth, providing a prop for the token alongside potential ETF demand. The dominant cryptocurrency is still trading well below its November 2021 record of almost $69,000.

Bitcoin miners Marathon Digital Holdings Inc. and Riot Platforms Inc., top US crypto exchange Coinbase Global Inc. and software-company-turned-Bitcoin-investor MicroStrategy all jumped as crypto markets recovered. Coinbase’s almost 400% gain weathered a lawsuit from the Securities and Exchange Commission for allegedly running an unregistered platform, an accusation the company contests.

Bitcoin derivatives saw a burst of activity in 2023. Bitcoin options open interest on Deribit — the largest crypto options exchange — exceeded $16 billion for the first time in December, according to CCData. Bitcoin futures open interest also hit landmark levels at CME Group, which is now vying with Binance to be the top marketplace for such instruments.

The decentralized finance sector has yet to recover from the more than $40 billion collapse of the TerraUSD stablecoin project in 2022. One exception is liquid staking, where the total value of locked assets rose to a record this year, data from DefiLlama show. Liquid staking protocols offer easier access to the rewards earned when tokens are pledged to help operate blockchains. Staking grew in popularity on Ethereum after the network’s Shanghai update in April.

Weekly trading volumes for nonfungible tokens — digital collectibles — have climbed off lows of less than $50 million in October, reaching about $180 million this month, according to figures from Nansen. But they are a fraction of the $1.8 billion peak seen in 2022, suggesting crypto generally has much work to do to reignite the level of interest the sector attracted during the pandemic, when the world was awash with stimulus.

While Bitcoin’s price has jumped, the crypto market still shows scars from the collapse of Bankman-Fried’s FTX platform and his trading house Alameda Research in November 2022. The wipeout contributed to a drop in liquidity, making the token harder to trade.

Market depth, or the crypto market’s ability to shoulder relatively large orders without unduly impacting prices, illustrates the problem. The daily value of trades falling within 1% of the mid-price of Bitcoin on centralized exchanges has dropped 55% to about $680 million from as much as $1.5 billion in April last year, Kaiko data shows.

There have been big shifts in the market share of crypto exchanges this year. Binance remains the largest venue but its share of spot trading fell to about 44% by mid-December from over 65% at the start of 2023, according to Kaiko. Asia-focused platforms like Upbit, Bybit and OKX picked up much of the business Binance lost.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Zoomed Out | Bitcoin vs NIFTY— here’s a comparative analysis of risk and reward

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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In the ever-evolving landscape of financial markets, the allure of Bitcoin (BTC) as a viable investment has been growing day by day. While some still perceive it as a risky venture, a closer examination reveals that Bitcoin offers unique benefits and can play a crucial role in diversifying investment portfolios.

In this article, let’s explore the misconceptions surrounding Bitcoin’s risk and reward, and how strategically incorporating Bitcoin can improve the health and performance of portfolios containing traditional assets.

Dispelling the myth of Bitcoin’s inherent risk

Bitcoin has long been associated with high volatility, leading many to view it as an excessively risky investment. However, a deeper analysis suggests that this perception may be somewhat exaggerated. Bitcoin’s volatility has decreased over time, and its maturation as an asset class signals a more stable crypto market.

Over the last five years, the annualised returns of BTC and various crypto indexes have consistently been higher than that of NIFTY 50 and other traditional market indexes in India.

Although the crypto market exhibits higher volatility compared to traditional markets, it is important to look at the risk to reward ratio. Let’s look at the Sharpe ratio, a financial metric that tracks the amount of rewards an investor will get per unit risk that the investor undertakes. The data indicates that the Sharpe ratio of BTC is comparable to that of the NIFTY 50 over the same period. Furthermore, the Sharpe ratio of BTC is increasing. NIFTY 50’s Sharpe ratio stands at 1.3, while BTC exhibits a Sharpe ratio of 0.9.

The Value at Risk (VaR), a metric gauging the risk level of an asset, is notably higher in the crypto market. Nevertheless, examining the past five years reveals a declining trend in the VaR for BTC and crypto market indexes, indicating a diminishing level of risk as the market matures.

To elaborate, BTC has had a VaR of 6% over the past 5 years, while NIFTY Indexes have a VaR of around 2%. A daily VaR of 5% implies that within a span of 100 days, there is a possibility of witnessing losses equal to or exceeding 5% on five days. This statistical measure provides insights into the potential downside risk associated with an asset or market.

The observed reduction in VaR of BTC over the past half a decade suggests a maturation process in the crypto market, contributing to a more stabilised risk environment.

Moreover, it’s essential to recognise that risk is an inherent aspect of any investment, and solely focusing on short-term price fluctuations can obscure the broader potential that Bitcoin presents.

Investors should adopt a long-term perspective, acknowledging that volatility can also bring opportunities for substantial returns.

Uncorrelated to Nifty —a diversification powerhouse

One of Bitcoin’s most compelling features for portfolio diversification is its lack of correlation to traditional assets like the Nifty index. Bitcoin operates on a decentralised platform, largely independent of the factors influencing traditional financial markets. This lack of correlation means that Bitcoin can act as a hedge against market downturns, providing a valuable diversification tool for investors seeking to mitigate risk.

For investors looking to delve into smaller-cap stocks represented by indices like Nifty Small and Nifty Midcap, the addition of Bitcoin can reduce the overall Beta of the portfolio. Beta is a risk metric that measures the sensitivity of an asset to volatility in the market. The higher the beta, the more susceptible an asset will be to market fluctuations. So, a positive Beta implies the positive correlation between the asset and the market in general while the magnitude of Beta on the other hand gauges the extent of fluctuations.

The Beta of BTC against NIFTY is a mere 0.26 while that for the NIFTY Smallcap and NIFTY Large Cap indices are close to 1. While BTC by itself is more volatile as compared to NIFTY, a low Beta implies that it is unlikely that both of them will have a downturn at the same time. This means that BTC can provide a good hedge against downturns and fluctuations in the traditional markets.

An illustrative portfolio scenario

As an example, let’s compare two hypothetical portfolios —one with NIFTY50, NIFTY Midcap and NIFTY Smallcap indexes in a 50:30:20 ratio and another where instead of 20% Small Cap holdings, Bitcoin is given 5% weight and 15% to NIFTY Smallcap index.

Both these portfolios have the same risk-to-reward ratio, but investing in BTC allows the latter to have better annualised returns. While both these portfolios have a Sharpe ratio of 1.5, the portfolio with Bitcoin has annualised returns of 25% as compared to 20% for the other one. Even though this seems like a small improvement, compounded over 5 years this 5% can translate to a difference of over 50% in aggregate returns.

Over the past 5 years, the Beta of the NIFTY MidCap and Smallcap indexes against the NIFTY 50 have increased while that of Bitcoin and crypto indexes have decreased. So, by introducing Bitcoin into these portfolios, investors can further improve diversification and returns. Bitcoin’s unique risk-return profile and lack of correlation to traditional assets can contribute to a more balanced and dynamic portfolio.

It is important to note that while higher volatility introduces additional risk, it also opens the door to greater potential rewards. Investors willing to embrace a slightly higher level of risk can strategically allocate a portion of their portfolios to Bitcoin, harnessing its characteristics to enhance overall portfolio performance.

Conclusion

In conclusion, the prevailing narrative that Bitcoin is an excessively risky asset is due for a reassessment. The evolving nature of the cryptocurrency market, coupled with Bitcoin’s maturation as an asset class, positions it as a valuable component in a well-diversified portfolio.

Its lack of correlation to traditional assets like Nifty, combined with the potential to reduce beta in portfolios containing assets such as Nifty Small and Nifty Midcap, makes Bitcoin a promising choice for investors seeking to navigate the complexities of today’s financial landscape.

As with any investment strategy, due diligence and a comprehensive understanding of the risks involved are essential. However, dismissing Bitcoin solely on the basis of perceived risk may mean missing out on a powerful tool for achieving diversification, resilience, and potentially higher returns in the long run. As the financial landscape continues to evolve, embracing innovative assets like Bitcoin can be the key to unlocking new avenues of growth and opportunity in investment portfolios.

—The author, Edul Patel, is CEO of Mudrex, a Global Crypto Investment Platform. The views expressed are personal.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow