A New Thought On Sizing Bitcoin

AQR alum Aaron Brown, writing for Bloomberg, laid out a case for allocating to Bitcoin that I haven't heard before. The article is reasonably two-sided spelling out what could lead to wider adoption and what might stifle wider adoption all without giving any sort of price target.

His suggested allocation, more precisely the allocation he chose for himself is 3%. That is based on his estimate that "crypto would be 3% of the global economy." It seems somewhat random of course but he went through some sort of study process, drew that conclusion and allocated to it. He says he's maintained 3% so there's been buying and selling along the way to maintain that level. 

If you're engaged in FinTwit at all you've seen an endless stream related to every possible machination of the eventual green light to ETFs that track spot bitcoin. When they come there will be a flood of them, with best guesses calling for approvals to come in January. The field now has various futures based funds to proxy for bitcoin along with the Grayscale Bitcoin Trust (GBTC) which is the oldest tracker that although not technically a closed end fund pretty much is that as far as end user engagement goes. 

Simplify ETFs has a couple of return stacking funds that work Bitcoin in there via GBTC. The Simplify US Equity PLUS GBTC ETF (SPBC). It's 100/10, iShares S&P 500 (IVV)/GBTC, so it is leveraged. IVV is a personal holding. At 30,000 feet, working that idea into a portfolio seems valid, I would say to take the leverage in the fund as a way to leverage down in the portfolio but that's just me. Using SPBC to get to Brown's 3%, you'd put 30% into SPBC which would probably cover a big chunk the equity allocation, all of the Bitcoin and then maybe you'd add something else to get to whatever allocation you want to equities...in theory.

When we talk about alts that don't do very well, quite a few seem to come from Simplify. The time sample is short but SPBC's lag appears to be quite a bit larger than the gross expense ratio listed of 0.72%. My guess is the lag has something to do with how it rebalances, but that is only a guess, but if correct then as has been the case with other products, there's something in the implementation that just doesn't work. 

If you want Bitcoin exposure in a brokerage account, one of the plain vanilla, I can't believe I'm saying plain vanilla, funds will be fine. I don't think there's much benefit from the complexity of having it in something like SPBC. If you use some sort of actively managed multi-strategy fund that dabbles in Bitcoin, I'd say that is different but I can understand any pushback on that idea. 

In my opinion though, nothing has changed with Bitcoin, it is no closer to validation or being invalidated. Yeah, it might go to a bazillion but it might also go to zero so size accordingly. If you haven't dabbled and you want to, start with a dollar amount that you can afford to lose entirely. It's probably the most asymmetric speculation there's ever been but if it does grow into a life changing piece of money for you, sell it and let it change your life. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.