Simplified bitcoin exposure via spot ETFs will help reduce traditional portfolio risk: analysts

Approval of bitcoin spot ETFs in the United States would simplify access to bitcoin exposure, helping to reduce traditional 60/40 portfolio risk by diversifying into the digital asset, according to the latest K33 Research report.

“We expect diversification and risk-adjusted outperformance to be key go-to-market strategies from the various ETF providers,” Senior Analyst Vetle Lunde and Vice President Anders Helseth said.

Since 2020, bitcoin has proven its worth as a powerful tool for portfolio diversification, the analysts argued. An investor with 1% exposure to bitcoin in a traditional 60/40 portfolio would have outperformed a portfolio without bitcoin exposure by 3.16%. The traditional 60/40 portfolio is a classic investment strategy that involves allocating 60% to stocks and 40% to bonds. 

Despite a muting of the bitcoin diversification narrative during 2022's crypto market turmoil, bitcoin exposure this year would have improved risk-adjusted returns in a traditional portfolio due to softening correlations and solid upside, the analysts added.

Last week’s narrow window to approve all current bitcoin spot ETF applications simultaneously ended on Friday with the Securities and Exchange Commission’s decision to delay on Hashdex and Franklin’s proposed bitcoin spot ETFs. The SEC also delayed a decision on Global X’s application. Emphasis now shifts to the next deadline on Jan. 10.

“In this scenario, momentum might slow in the crypto markets as there would likely be multiple weeks to wait for significant news relating to the ETFs,” Lunde and Helseth said at the time.

Bitcoin consolidates as CME traders retain upside exposure

Despite significant news-induced volatility in the crypto markets amid BlackRock and Fidelity's ether spot ETF filings, comments from Ark Invest’s Cathie Wood on a potential SEC denial of Grayscale’s bitcoin spot application and Binance and Changpeng Zhao’s criminal case settlement with the U.S. Department of Justice yesterday, bitcoin continues to consolidate — up a modest 2% over the past week.

Ether resumed its year-long underperformance against bitcoin, falling 2%, while Binance’s BNB is up around 8% in the last week as traders price in the implications of the settlement against the cloud it potentially lifts over the industry, possibly helping to greenlight the bitcoin spot ETF proposals.

Traders on the CME maintained their upside exposure to bitcoin last week. With futures premiums staying well above double digits and open interest at all-time highs, the market is witnessing significant bullish sentiment, the analysts said. Having eliminated ether’s basis discount relative to bitcoin in October, premiums for both remain aligned at an annualized rate of 18%. The basis is the difference between the spot price of an asset and its futures price.

“Current market signals indicate that CME traders want to carry their exposure into December, with the December vs November contango sitting at a massive 1.69%,” Lunde and Helseth wrote. “This is higher than the previous record-high contangos from October 2021.”

Bitcoin BTC -1.60% -based ETP inflows add to the narrative, with 35-day net inflows now sitting at 32,011 BTC ($1.17 billion), coinciding with new signs of active communication between the SEC and bitcoin spot EFT filers, further solidifying the odds of approvals by Jan. 10, the analysts said.

Crypto natives on the fence

However, crypto-native perpetual traders have adopted a more cautious approach, reducing the likelihood of liquidation squeezes in the near term, Lunde and Helseth noted.

Open interest remained at an 18-month low over the past week, and funding rates returned to neutral levels — indicating more balanced market sentiment.