• June 5, 2023

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To those who are constant readers (thank you), you have seen me write on a few occasions about what we at Proficio Capital Partners call our “Hard Currency” asset class. “Hard Currency” is a basket, that we believe is diversified and inflation protected, and potentially spans across gold, silver, platinum, non-USD currencies and Bitcoin

. Based on our proprietary models, we believe that this asset class has already started, and could continue to provide better returns compared to equities and fixed income for the foreseeable future. Therefore, we allocate 15-25% of our assets to this class (the range accounting for dynamic hedging). At the moment this is a gold centric portfolio (an article explaining why coming soon), but before that I wanted to address a timelier issue. Naturally, you might ask “what is Bitcoin still doing there???”

For context you may want to re-read my previous two pieces on Bitcoin, which provide a guide as to how I have approached the asset over the last 18 months. The first, from December 2020 (The Great Gold Vs Bitcoin Currency Debate (forbes.com)), dove into why I posited holding Bitcoin as a 1% position in a portfolio with 25% allocated to gold. I explained how, from a fundamental standpoint, Bitcoin should be classified the same as gold. An instrument with a predetermined supply of 21 million should act as a hedge to inflation. The reason for the 1% was that if Bitcoin were to end gold’s run as the go to store of value, then that would provide enough return to benefit a portfolio.

In June of 2021, with Bitcoin up over 70% from my original piece, I followed up on why I was exiting the investment (Revisiting The Great Gold/Bitcoin Debate (forbes.com)). Not only did I feel uncomfortable holding an asset so quickly banned from China, but it was showing no meaningful correlation to gold or what drives gold (real rates and the dollar). In addition, we had created fundamental models that went bearish. Finally, according to Bloomberg (which all our data is cited), Bitcoin’s market share of Crypto assets decreased from ~65% to 40%, indicating to us that something other than wealth preservation was afoot.

Now, just under a year from my last Bitcoin piece, Bitcoin is down about 15% from when I suggested exiting, and its clearer now what has happened. Bitcoin miners were able to relocate quickly, return the hash rate to pre-ban levels and Bitcoin surged to all-time highs in November 2021. We saw continued institutional adoption and El Salvador became the first country to adopt Bitcoin as legal tender. Since late 2021 though, there has been a painful drawdown of about 55% leaving us today with a price around $30k. With so much price action why didn’t I report earlier? Well, it never became a part of our Hard Currency portfolio again, because nothing in my process changed and Bitcoin acted like, and correlated to, high-beta equity—the antithesis of a hard currency.


It is by no means perfect, and we are constantly improving on it, but the process we have developed for Bitcoin stands on three legs – Market share, correlation statistics, and fundamental models. We view all three in aggregate without giving any one more weight than the other. Our models are built on the backs of mining profitability and holding period adjustments. More specifically, we look closely at whether miners are distributing or accumulating coins and the dynamic coin movement amongst short- or long-term holders. During the violent run to nearly $70k in late 2021, these models did flip positive, but we never jumped in on Bitcoin because of the other levers in our process.

As I wrote about last June, Bitcoin’s market share of the crypto world sat around 65% in 2020. As the bull run raged, this declined to as low as 40%. For over a year now, Bitcoin’s market share has remained rangebound between 40% and 45%. This despite a Russian invasion of Ukraine and a global upswing in inflation. I will not comment on the thousands of other cryptos that exist today. Some may be generational platforms that forever change the way our world works. But if Bitcoin is to be a store of value, then I would have liked to see it separate from the pack, and its’ market share increasing during times of turmoil. Certainly, gold has been much better in response to inflation. Since inflation became obvious as a major problem 6 months ago, Grayscale Bitcoin Trust (GBTC) is down about 65%, while gold is flat.

That brings us to the third leg, correlation (a measure of the degree to which two variables move in relation to each other, which we track via Bloomberg). When I wrote last about Bitcoin I focused on its’ correlation to gold and what drives it (real rates and the dollar). I continue to look at this, and it has not changed meaningfully (correlations have actually gotten more negative on a 3-month, 6-month and 1 year basis between Bitcoin and Gold). This also holds true between Bitcoin and real rates or the dollar. What is interesting now is Bitcoin’s correlation to broader equities (like the S&P) and certain sectors within it. On a rolling 3-month basis the correlation between Bitcoin and S&P is as high as ever sitting above 0.7. I have also been tracking Bitcoin against ticker “IGV

” (iShares Expanded Tech-Software ETF), and the correlation between the two on a rolling 3-month basis is 0.76. I am sure there are other ETFs like this that would lead to a similar conclusion, but the top 3 holdings of “IGV” are Microsoft

, Adobe

and Salesforce. So, while I view Bitcoin as being qualitatively like gold, it is hard for me to invest until it diverges from risk assets and acts as a currency.

I understand that $30k Bitcoin (off 55% from all-time highs) sounds like a great buying opportunity. But, as it stands now, none of the three levers I track are telling me to do so. Our models have not yet showed signs of strength, Bitcoin’s market share of crypto remains between 40-45% and correlation continues to look more like risk assets rather than gold. The Fed is just beginning to tighten into a slowing economy, and no one can predict the next Luna

and whether or not it will drag with it the rest of crypto. I see all the potential and then some for Bitcoin, but as a risk manager, the market views Bitcoin as high-beta equity and that is the asset directly in the crosshairs of the Fed. So, we await act IV when Bitcoin matures (or doesn’t) into what it could/should be. Stay away – but be ready!


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