BlackRock: “The optimal BTC allocation is a large 84.9%”

[KalOlak]

"Starting with 60-40 equity-bond portfolio, which is produced with a risk aversion of gamma=1.5, the optimal BTC allocation is a large 84.9%"

My calculations show that the optimal bet in Bitcoin is still an absolute value of 2.625 Bitcoin, as it allows for sufficient decentralization of the supply among approximately eight million holders (Top 0.1%). After all, the value of Bitcoin as an asset lies precisely in the decentralization of its supply. A simple thought experiment can show that if Satoshi had kept all 21 million Bitcoins to himself and never shared this idea with anyone, the value of Bitcoin would be zero.

discuss

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[Doan9269]

And now that Satoshi never kept all the bitcoin to himself, what more should we expect, how also has this got to do with BlackRock holdings, why is BlackRock a major figure for discussion here, we need more clarity and informations from you on this, please could you take more time to expanciate more things we needed  to learn from this?

[KalOlak]

And now that Satoshi never kept all the bitcoin to himself, what more should we expect, how also has this got to do with BlackRock holdings, why is BlackRock a major figure for discussion here, we need more clarity and informations from you on this, please could you take more time to expanciate more things we needed  to learn from this?

BlackRock is the world's biggest asset manager, with over $7 trillion in assets.

"Asset Allocation with Crypto: Application of Preferences for Positive Skewness"
Andrew Ang, Tom Morris, Raffaele Savi


Andrew Ang
is a managing director at
BlackRock in New York, NY.

Tom Morris
is a managing director at
BlackRock in London, UK.

Raffaele Savi
is a managing director at
BlackRock in San Francisco,CA.

https://www.pm-research.com/content/iijaltinv/25/4/7

[goldkingcoiner]

"Starting with 60-40 equity-bond portfolio, which is produced with a risk aversion of gamma=1.5, the optimal BTC allocation is a large 84.9%"

My calculations show that the optimal bet in Bitcoin is still an absolute value of 2.625 Bitcoin, as it allows for sufficient decentralization of the supply among approximately eight million holders (Top 0.1%). After all, the value of Bitcoin as an asset lies precisely in the decentralization of its supply. A simple thought experiment can show that if Satoshi had kept all 21 million Bitcoins to himself and never shared this idea with anyone, the value of Bitcoin would be zero.

discuss

I would completely agree with you on the fact that decentralization of the Bitcoin supply is definitely going to solve the problem out by itself in the future but currently having such giants as Blackrock holding on to such huge bags is a bit scary. Who says Blackrock would not screw the entire market over by pumping and dumping Bitcoin?

My only advice is to hold on to your coin and avoid panic selling. Actually, from my experience, selling on any kind of reason is always a huge mistake.

But the question remains of why are we so concerned about the current price of Bitcoin, which is liable to be manipulated by such huge institutional whales, instead of excited that Bitcoin still has an ocean of untapped potential. Anyone holding even half a Bitcoin is going to enjoy a nice life in the future.

[blue Snow]

After all, the value of Bitcoin as an asset lies precisely in the decentralization of its supply.

Sure. BlackRock only holds the Bitcoin stock!. they don't like MicroStrategy company and Saylor who really bought the bitcoin on the market.
so whatever BlackRock bought, that does not affect anything on bitcoin supply. The supply is still intact in the wallet that owns the real Bitcoin. Because the company still thinks, this instrument is the same as their asset like a stock which I think is really different from others.

[Darker45]

I seriously doubt BlackRock would adopt this analysis and view. This may be something that can easily be adopted by much smaller individual or retail investors like me. But to an institution that is worth billions and is managing trillions, I don't think this is worth the risk. Whatever happened to diversification?

This is so different from the views of other respected figures in the world of finance. The same paper cited Thomas Peterffy's 2%-3% and Ray Dalio's 1%-2%.

Anyway, the subject is misleading. You should correct it lest it be misunderstood as a mega-bullish stand of BlackRock. This actually isn't BlackRock's opinion or view. This is simply the personal view of the three authors who happened to be working with BlackRock. But this study is not in any way sanctioned by BlackRock itself.

[adaseb]

Yes it’s optimal but doesn’t mean it will happen. I am assuming they got the 2.65BTC by taking 21 million and dividing by 8 million.

The way blackrock will make money is not by holding BTC but by the fees earned from the management of the fund. Every year they will get like 0.1% whether the price goes up or down. That’s the goal. The more people buy the fund, the more money they will make in fees.

[slaman29]

Before even starting a discussion on the statement I would like to discuss the originator of the statement, Blackrock itself.

Same Blackrock involved in $4B investment scandal with CEO and portfolio manager all involved.

My question is not about if bankers are good or bad, I don't care if I think they are bad. My question is, for someone who has history of making terrible investment advices, why should we listen to them about Bitcoin?

[avikz]

"Starting with 60-40 equity-bond portfolio, which is produced with a risk aversion of gamma=1.5, the optimal BTC allocation is a large 84.9%"

My calculations show that the optimal bet in Bitcoin is still an absolute value of 2.625 Bitcoin, as it allows for sufficient decentralization of the supply among approximately eight million holders (Top 0.1%). After all, the value of Bitcoin as an asset lies precisely in the decentralization of its supply. A simple thought experiment can show that if Satoshi had kept all 21 million Bitcoins to himself and never shared this idea with anyone, the value of Bitcoin would be zero.

discuss

Circulation and decentralization is the backbone of bitcoin. I am never very supportive to the fact that the large corporates buying into bitcoin. It ends the decentralization effectively and ensure that the corporates control the crypto market. It is never an ideal situation. While corporate investment increases the liquidity in the market, but they get the power to control the market.

Companies like Blackrock is here because they sniff profit. Think what will happen when these large corporations will start booking their profits! Bitcoin should stay in the hands of the common public and not in the hands of the corporates.

[Tytanowy Janusz]

A simple thought experiment can show that if Satoshi had kept all 21 million Bitcoins to himself and never shared this idea with anyone, the value of Bitcoin would be zero.
discuss

1- So go and buy all 21 million bitcoin from satoshi for zero in this scenario. i'm sure he won't give them away at this price. During ICO all coins are in hands of DEVS and yet they collect hundreds of millions for few % of supply.
2- satoshi never had 21 million bitcoins. When wrote his last post on bitcointalk (when he disappeared from crypto space), there were only 20% of bitcoins mined.

"After all, the value of Bitcoin as an asset lies precisely in the decentralization of its supply." - why? the dollar is the strongest and most widely used currency, and its supply is far from being decentralized. The network is to be decentralized, miners should be decentralized, not supply. This is proof of work, not proof of stake

[Husires]

People tend to spend their precious things because of human love to get some luxury, so if the price of Bitcoin rises strongly, people tend to buy, and if it drops sharply, people tend to sell in the hope of reducing losses, and this is what makes Bitcoin fluctuate greatly in levels of uncertainty, which are those levels in which the price moves to a greater extent From 10% per week.

During normal trading times, Bitcoin is mined, which continues to create a quantity supplied, unless there is a corresponding amount of supply of demand, the price of Bitcoin will decrease, and here more people will tend to buy, and so on until there is a parity in the price.

These things will make everyone not keep all of the bitcoin, but rather a part of it, and thus the continuity of trading.

[KalOlak]

People tend to spend their precious things because of human love to get some luxury, so if the price of Bitcoin rises strongly, people tend to buy, and if it drops sharply, people tend to sell in the hope of reducing losses, and this is what makes Bitcoin fluctuate greatly in levels of uncertainty, which are those levels in which the price moves to a greater extent From 10% per week.

During normal trading times, Bitcoin is mined, which continues to create a quantity supplied, unless there is a corresponding amount of supply of demand, the price of Bitcoin will decrease, and here more people will tend to buy, and so on until there is a parity in the price.

These things will make everyone not keep all of the bitcoin, but rather a part of it, and thus the continuity of trading.

You've provided a good example. Let's conduct a hypothetical thought experiment: "What if Bernard Arnault (LVMH) buys 2.625 Bitcoins than joins the religious Order 2.625 and continues to sell useless luxury for insane amounts of money?"

Let's delve into this scenario further. As a plebeian of Order 2.625, Bernard Arnault should be interested in the liquidation of the degen risk takers using exclusively Bitcoin. If Bernard Arnault chooses to liquidation of the degen risk takers using by selling them Birkin bags or expensive cognac, it goes against our Creed (84.9% Strategy). In such a case, the LVHM company could be immediately liquidated through clever manipulations by the Great Liquidators, who have control over all stock exchanges (let's assume BlackRock Company). Thus, it is more likely that someone as seemingly intelligent as Bernard Arnault would choose to adhere to the Creed (84.9% Strategy), causing the price of Birkin bags to drop from $66,666 to around $66, which is their fair price.

[HeRetiK]

Anyway, the subject is misleading. You should correct it lest it be misunderstood as a mega-bullish stand of BlackRock. This actually isn't BlackRock's opinion or view. This is simply the personal view of the three authors who happened to be working with BlackRock. But this study is not in any way sanctioned by BlackRock itself.

I'm not sure I'd even call it the personal view of the authors. If you read the paper, the number quoted by OP (and various crypto-news outlets) is not even the conclusion. It's just the cherry picked result of one of two mathematical asset allocation models being applied to Bitcoin. The other model they apply, Cumulative Prospect Theory, comes to a slightly different conclusion:

In order to obtain finite solutions, we change the mean of BTC in the normal regime to correspond to a loss of 90%. That is, we set exp(𝜇2) = 0.1, or 𝜇2 = −2.303. We also change the probability of the bliss regime to 𝑝 = 0.001, with the same mean, 𝜇1, and standard deviation, 𝜎1, of the BTC bliss regime as the empirical estimate reported in Exhibit 3. This distribution has the same extreme right-hand tail payoff as the original process, but it occurs with a much smaller probability, 𝑝 = 0.001, versus the empirical estimate of 𝑝 = 0.036. Even with this tiny probability, the optimal BTC holding is 9.5% holding the 28-72 equity-bond portfolio fixed in pro-rata allocations. Exhibit 7, Panel B plots the CPT utility function for the three-asset BTC-equities-bonds portfolio. The maximum utlity corresponds to the optimal BTC holding of 9.5%, with the equity and bond holdings being held in the same 28-72 pro-rata allocation for the remaining 90.5% of the portfolio.

TL;DR: The authors apply two models, one resulting in a BTC allocation of 84.9% and a risk averse one, resulting in a BTC allocation of 9.5%. The latter one is not newsworthy nowadays, so of course everyone is only focusing on the bigger number.

(even 9.5% percent would still be huge, mind you)

[onecall123]

I'm feeling a mixed situation right now, neither good or bad.
For the past several years, there have been efforts to regulate cryptocurrencies. But, we all see it as a way to manage something that's hard to control.
The reason behind this push is that they haven't figured out how to beat the influence of bitcoin, so they're trying to adjust their approach to stay relevant.
Anyway, I'm wondering if a new bullish trend is about to start!

[KalOlak]

Anyway, the subject is misleading. You should correct it lest it be misunderstood as a mega-bullish stand of BlackRock. This actually isn't BlackRock's opinion or view. This is simply the personal view of the three authors who happened to be working with BlackRock. But this study is not in any way sanctioned by BlackRock itself.

I'm not sure I'd even call it the personal view of the authors. If you read the paper, the number quoted by OP (and various crypto-news outlets) is not even the conclusion. It's just the cherry picked result of one of two mathematical asset allocation models being applied to Bitcoin. The other model they apply, Cumulative Prospect Theory, comes to a slightly different conclusion:

In order to obtain finite solutions, we change the mean of BTC in the normal regime to correspond to a loss of 90%. That is, we set exp(𝜇2) = 0.1, or 𝜇2 = −2.303. We also change the probability of the bliss regime to 𝑝 = 0.001, with the same mean, 𝜇1, and standard deviation, 𝜎1, of the BTC bliss regime as the empirical estimate reported in Exhibit 3. This distribution has the same extreme right-hand tail payoff as the original process, but it occurs with a much smaller probability, 𝑝 = 0.001, versus the empirical estimate of 𝑝 = 0.036. Even with this tiny probability, the optimal BTC holding is 9.5% holding the 28-72 equity-bond portfolio fixed in pro-rata allocations. Exhibit 7, Panel B plots the CPT utility function for the three-asset BTC-equities-bonds portfolio. The maximum utlity corresponds to the optimal BTC holding of 9.5%, with the equity and bond holdings being held in the same 28-72 pro-rata allocation for the remaining 90.5% of the portfolio.

TL;DR: The authors apply two models, one resulting in a BTC allocation of 84.9% and a risk averse one, resulting in a BTC allocation of 9.5%. The latter one is not newsworthy nowadays, so of course everyone is only focusing on the bigger number.

(even 9.5% percent would still be huge, mind you)

It is highly probable that this paper has been shared within Blackrock's internal circulation, which is a common practice when employees co-author academic papers. Furthermore, the authors' positions seem to be at a mid- to senior-level, which further increases the likelihood of this paper being circulated internally.

Hence, the findings presented in this paper are better suited for understanding the behavior of retail investors, as they typically have a significant portion of their personal wealth invested in Bitcoin and tend to be less risk-averse compared to institutional investors. Conversely, when considering institutional investors, it would be more reasonable to assume a relatively high level of risk aversion, leading to a Bitcoin allocation closer to 10% as suggested by the model, which seems to be a more plausible scenario.

[Blitzboy]

First, the 60-40 equity-bond portfolio with gamma=1.5 risk aversion isn't fixed, right? Market conditions, risk tolerance, and financial goals heavily influence allocation decisions.Is your 2.625 Bitcoin ideal bet fixed or flexible? Market conditions alter, thus sticking to a number could miss chances or cause problems.

Decentralization is important, but it's not everything. Utility, adoption rate, and regulatory environment can dramatically impact Bitcoin's value. Your thought experiment about Satoshi keeping all Bitcoins is intriguing, however it oversimplifies cryptocurrency valuation processes.

[KalOlak]

First, the 60-40 equity-bond portfolio with gamma=1.5 risk aversion isn't fixed, right? Market conditions, risk tolerance, and financial goals heavily influence allocation decisions.Is your 2.625 Bitcoin ideal bet fixed or flexible? Market conditions alter, thus sticking to a number could miss chances or cause problems.

Decentralization is important, but it's not everything. Utility, adoption rate, and regulatory environment can dramatically impact Bitcoin's value. Your thought experiment about Satoshi keeping all Bitcoins is intriguing, however it oversimplifies cryptocurrency valuation processes.

Since the total supply is strictly limited, and decentralization of supply is crucial to avoid market manipulation, the optimal strategy in this game for approximately eight million players (the ideal and unattainable outcome) is to possess exactly 2.625 Bitcoin and never sell (never rebalancing a portfilio).

In any case, what is 2.625 Bitcoins at the current price? It's just the cost of a new BMW 3 series or a Benz C-class. The loss from this strategy is strictly limited, while the potential profit is infinite.

[MinoRaiola]

Supply and demand handel the price and this is flexible as possible if no bank or authority can decide how much supply is available. The supply of Bitcoin is calculable and everyone can freely offer their Bitcoin. The demand is important to regulate the price, where there is no demand the price is low, but for example with breaking news, then the price can increases. Whether you % invest of your portfolio in Bitcoin or other is individual.

[KalOlak]

Supply and demand handel the price and this is flexible as possible if no bank or authority can decide how much supply is available. The supply of Bitcoin is calculable and everyone can freely offer their Bitcoin. The demand is important to regulate the price, where there is no demand the price is low, but for example with breaking news, then the price can increases. Whether you % invest of your portfolio in Bitcoin or other is individual.

With zero supply, the demand can indeed be zero, but it can also be infinitely large.

[Darker45]

Anyway, the subject is misleading. You should correct it lest it be misunderstood as a mega-bullish stand of BlackRock. This actually isn't BlackRock's opinion or view. This is simply the personal view of the three authors who happened to be working with BlackRock. But this study is not in any way sanctioned by BlackRock itself.

I'm not sure I'd even call it the personal view of the authors. If you read the paper, the number quoted by OP (and various crypto-news outlets) is not even the conclusion. It's just the cherry picked result of one of two mathematical asset allocation models being applied to Bitcoin. The other model they apply, Cumulative Prospect Theory, comes to a slightly different conclusion:

In order to obtain finite solutions, we change the mean of BTC in the normal regime to correspond to a loss of 90%. That is, we set exp(𝜇2) = 0.1, or 𝜇2 = −2.303. We also change the probability of the bliss regime to 𝑝 = 0.001, with the same mean, 𝜇1, and standard deviation, 𝜎1, of the BTC bliss regime as the empirical estimate reported in Exhibit 3. This distribution has the same extreme right-hand tail payoff as the original process, but it occurs with a much smaller probability, 𝑝 = 0.001, versus the empirical estimate of 𝑝 = 0.036. Even with this tiny probability, the optimal BTC holding is 9.5% holding the 28-72 equity-bond portfolio fixed in pro-rata allocations. Exhibit 7, Panel B plots the CPT utility function for the three-asset BTC-equities-bonds portfolio. The maximum utlity corresponds to the optimal BTC holding of 9.5%, with the equity and bond holdings being held in the same 28-72 pro-rata allocation for the remaining 90.5% of the portfolio.

TL;DR: The authors apply two models, one resulting in a BTC allocation of 84.9% and a risk averse one, resulting in a BTC allocation of 9.5%. The latter one is not newsworthy nowadays, so of course everyone is only focusing on the bigger number.

(even 9.5% percent would still be huge, mind you)

I tried reading the entire paper but because of my very limited comprehension capacity of the technicalities the authors were talking about, I decided not to continue.

I assume those who cherry-picked didn't also thoroughly understand the paper. They spread the cherry-picked lines, nonetheless. OP is one of them. There are many others in social media who did the same. Even those who I think are capable of separating the wheat from the chaff are equally irresponsible for spreading it. 

Worse, they are putting words in BlackRock's mouth. This isn't BlacRock's opinion. This is not a study done by BlackRock. BlackRock has nothing to do with it. Those who started spreading this fake news are just using the huge brand to create a baseless FOMO.