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Artificial intelligence stocks have stolen the spotlight in recent months, but Bitcoin could be one of Wall Street's next obsessions.
Artificial intelligence (AI) has been one of the hottest investment themes on Wall Street this year, and Nvidia (NVDA 0.01%) has become the quintessential AI stock due to its leadership in machine learning processors. But certain Wall Street analysts see a substantial opportunity taking shape around Bitcoin (BTC +0.01%) due to the recent approval of spot Bitcoin ETFs.
Several successful hedge fund managers sold shares of Nvidia during the first quarter, while simultaneously buying shares of the iShares Bitcoin Trust (IBIT +0.00%), one of the recently approved spot Bitcoin ETFs.
The three billionaires mentioned above are noteworthy because they run the three top hedge funds as measured by net gains since inception, according to LCH Investments. Readers should not interpret their trades to mean Nvidia is a bad investment, but rather that diversification has merits. Here's why the iShares Bitcoin Trust is a worthwhile long-term holding for risk-tolerant investors.
At any given moment, Bitcoin's price is determined by supply and demand. However, its supply is limited to 21 million coins, so demand is ultimately the driving force behind price action. In other words, demand for Bitcoin would need to increase substantially for its price to reach $1 million, and even more substantially for its price to reach $3.8 million.
Bernstein and Ark Invest believe that demand will come from spot Bitcoin ETFs, a brand new asset class approved by the SEC earlier this year. Spot Bitcoin ETFs track the price of Bitcoin by holding the cryptocurrency as the underlying asset, and they eliminate traditional sources of friction that may have kept retail and institutional investors out of the market, as detailed below.
Bernstein and Ark Invest expect Bitcoin to follow different trajectories over the next decade, but they agree on one thing: Demand from institutional investors will drive the forecasted gains.
We are still in the early stages of adoption, but institutional demand for spot Bitcoin ETFs is evident in recent Forms 13F filed with the SEC. As mentioned, the top three hedge funds -- Citadel Advisor, D.E. Shaw, and Millennium Management -- have started positions in the iShares Bitcoin Trust. Several major investment banks, including JPMorgan Chase, Morgan Stanley, and Wells Fargo, have also bought into spot Bitcoin ETFs.
However, most institutional investors have very small positions at the present time, meaning their stakes represent inconsequential portions of their portfolios. But Bernstein analysts Chhugani and Sapra believe institutional investors are "in the process of evaluating 'net long' positions as they get comfortable with the improving ETF liquidity."
Similarly, Cathie Wood at Ark Invest believes institutional investors will eventually put a little more than 5% of their portfolios into spot Bitcoin ETFs. For context, institutions had nearly $120 trillion in assets under management last year, so Ark's forecast implies that those investors will allocate more than $6 trillion to spot Bitcoin ETFs in the future. Should that happen, Wood says the price of Bitcoin could reach $3.8 million.
Bernstein is also bullish on Bitcoin because of the halving event that took place in April 2024. "We believe a new cycle commencing with halving is not a coincidence, but driven by unique demand-supply dynamics," the analysts wrote in a recent note.
To elaborate, Bitcoin block subsidies -- newly minted Bitcoin awarded to miners for solving cryptographic puzzles to verify transaction blocks -- are reduced by 50% every time 210,000 blocks are added to the blockchain. Those halving events happen about once every four years, and the most recent one took place in April.
That is significant because Bitcoin has gone through three halving events before, and it's price has always reached a new peak 12 to 18 months later, as shown in the chart below.
|
Halving Date |
Peak Return |
Time to Peak Return |
|---|---|---|
|
November 2012 |
10,485% |
371 days |
|
July 2016 |
3,103% |
525 days |
|
May 2020 |
707% |
546 days |
As shown above, post-halving returns have diminished with each subsequent halving event, simply because each subsequent halving event has a smaller impact on the total supply. But history suggests Bitcoin will peak sometime between April 2025 and October 2025.
Past performance is never a guarantee of future returns, and price targets should never be taken for granted. Bitcoin is a relatively new asset class, and its limited track record means that forecasting its performance is essentially impossible.
Additionally, Bitcoin has declined by more than 50% on several occasions and similar drawdowns are plausible (if not probable) in the future. Investors comfortable with those risks should consider buying a position in the iShares Bitcoin Trust today. Adding exposure to the cryptocurrency is a great way to diversify a portfolio overloaded with AI stocks like Nvidia.
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