No one can know for sure whether Bitcoin is going to solve the world's problems or turn out to be a complete scam but I would suggest anyone to generally keep tabs on it. If you're an advisor, I think you have to be able to discuss it at least a little if a client asks. Many others have said pretty much the same thing as pertains to advisors being to discuss it at least superficially.
I've only had one client ever ask about it and when he finally asked if I thought he should buy it I gave the same answer that accounts for why I own it which is that after having spent time learning about it, I want to avoid the regret of learning about it and then watching it go to a bazillion without me. I own it via several different vehicles and am up kind of a lot but keenly aware it could all be BS.
This brings us to the latest development that the touts say could be very important. Fair warning that a lot of the Bitcoin evangelists do not engender a sense of trust for me. Jack Mallers from Stripe, one of the biggest evangelists out there, was on Bloomberg earlier in the summer calling $250,000 Bitcoin this year. Just ri-goddamn-diculous. I cringe anytime I hear Michael Saylor say anything. As a skeptical HODLer, dabble if you want but buyer beware.
The potentially important development is the recent approval for options on the iShares Bitcoin ETF and the expected approval for the other Bitcoin ETFs. Jeff Park from Bitwise had several Tweets on this that anyone who has already invested time to learn about Bitcoin might want to read. I have no idea if Park is drawing the correct conclusions but he notes that Bitcoin has an unusual volatility attribute. Volatility tends to rise as the price rises. It is more common across other asset classes for volatility to go down as the price rises.
If that dynamic continues to play out going forward, it creates visibility for what are called gamma squeezes. With other assets, when the selling starts and volatility goes up, liquidity providers need to sell more of whatever is going down to neutralize their risk exposure which can add fuel to the downward fire. Park is saying it will work the other way with Bitcoin. Liquidity providers will need to buy more Bitcoin as the price rises to maintain their neutral risk exposure. The bits of jargon here are delta, gamma and vanna if you want to dig in further. This link is to Park's Twitter profile if you want more details as my explanation does simplify it quite a bit. Just to reiterate, I have no idea if Park is drawing the correct conclusion about what this will mean for the price of Bitcoin.
Nate Geraci from the ETF Store also thinks that listing options on Bitcoin ETFs will be a big deal but for a different reason. He listed out that he expects there will be Bitcoin buffer ETFs, crazy high yielding YieldMax-like ETFs (there are a couple related to GBTC and others that already have crazy high yields) as wells at ETFs for Bitcoin risk and Bitcoin convexity. Who knows, I certainly don't (well the YieldMax-like is good bet) but for blogging purposes, I think we're going to have a blast with these.
A quick pivot to managed futures but really we could be talking about several types of alts. In the context of theories about building a 60/40 portfolio with 60% to equities and 40% managed futures instead of fixed income, I saw something somewhere about owning several different managed futures funds to build out the full allocation which in this case is an unrealistic (for me) 40%.
The idea of four different funds, or some other number, to build out the allocation would help diversify methodologies. It's unlikely that one fund would be long the yen and another fund short the yen but if the 10 month trend says to be long the yen, different funds might have different weightings to the yen based on risk or volatility. It is also possible for one fund relying just on 10 month trend to be long the yen and different fund that relies on multiple signals to be flat the yen like if the 10 month trend says be long while a shorter signal says to be short. In that instance the fund would probably be flat. Playing this example out, the shorter signal turns out to be right and the fund using only the ten month trend would feel the pain of having the wrong yen position while the multi-signal fund would simply avoid it. Enough if these nuanced difference and the funds looks slightly different.
Another accounting for dispersion between funds might be funds that fully implement managed futures versus funds that replicate with just ten or so markets.
I just chose funds that we blog about regularly and isolated the AQR and PIMCO funds simply because they are bigger fund companies than the others. The result is very surprising. Blending together four different managed futures funds as done in Portfolio 1 actually gave a higher standard deviation and lower Sharpe Ratio. The return of Portfolio 1 is slightly better but the idea is really about trying to diffuse risk which the diversified blend somehow does not do.
There's probably a reference to Karl Popper to be made with this result but either way it is a surprising outcome. Putting 40% into one alternative strategy, regardless of the number of funds, is not something I am ever going to do but looking back it has never blown up. Managed futures has struggled over different periods, yes, but never blown up. I can't come up with a guess for what would cause managed futures to blow up but paraphrasing a quip we've a few times lately, there is no risk of it blowing up until it blows up.
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.
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