For much of its history, Bitcoin (BTC +2.05%) has been considered the ultimate "risk on" asset. It is highly volatile, and it is prone to boom-and-bust cycles. Many investors and analysts warn against adding even a smidgen of Bitcoin to a portfolio, due to its unpredictable risk-reward profile.
But something very interesting has happened this year. The longer that global tariff uncertainty persists, the more talk there has been of Bitcoin becoming the ultimate safe haven asset. In short, Bitcoin has seemingly transformed from a "risk on" asset to a "risk off" asset, within an astonishingly short period of time. Let's take a closer look at what that could mean for your portfolio.
Bitcoin's unique characteristics
The Bitcoin currency is global, digital, decentralized, and non-sovereign. The supply of new Bitcoin is carefully controlled by an algorithm, and no central bank or sovereign government can change this.
Moreover, the total lifetime supply of Bitcoin is capped at 21 million coins, and nearly 20 million coins are already in circulation. This inherent scarcity is reinforced every four years, when Bitcoin undergoes a halving event. This event, which is controlled algorithmically, is inherently disinflationary, because it cuts the rate of new Bitcoin supply in half.
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Crypto enthusiasts have declared for more than a decade that, as a result of these characteristics, Bitcoin should be considered "digital gold." And this argument is finally starting to go mainstream. If you dive deep into different Bitcoin valuation models used by top institutional investors, you'll often find a proxy metric that takes into account the digital gold thesis.
For example, in its current Bitcoin valuation model, Ark Invest uses a metric called Digital Gold. This takes into account the total market cap of physical gold, and then projects a "penetration rate" for Bitcoin. In its bull-case scenario, this penetration rate is 60%.
Bitcoin's track record
Should you really be allocating part of your portfolio to Bitcoin right now as a potential hedge against economic and geopolitical uncertainty? If history is any guide, the answer to this question is "yes."
Last September, BlackRock examined the response of both gold and Bitcoin to a variety of shocks to the global financial system. These shocks included everything from wars to pandemics, as well as a mix of political and macroeconomic crises. BlackRock specifically looked at how gold and Bitcoin held up over both the short run and long run.
And the results might surprise you. In 5 of the 6 cases examined by BlackRock, Bitcoin outperformed gold over the long run. Gold typically performs very well in the very short term, but Bitcoin eventually catches up, narrowing the performance gap.
And that could be what we are seeing now. As soon as new tariffs were announced, the knee-jerk reaction of many investors was to move their money into gold. As a result, the price of gold has been soaring all year. But watch out for Bitcoin: Over the past 30 days, Bitcoin is up 25%, and the performance gap with gold appears to be narrowing.
What could the price impact be for Bitcoin?
What's really exciting is how this change in investor perception could affect the future upside potential of Bitcoin. One popular way to figure this out is to take the total market cap of gold and think of this as the "store of value" market for investors. You can then make a prediction about how much of this "store of value" market that Bitcoin will eventually capture.
So let's do the math. The total market cap of gold is estimated to be $20 trillion. If we assume that Bitcoin will account for 50% of the "store of value" market, then we can use a scaling factor of 0.5 to arrive at an implied valuation of $10 trillion for Bitcoin. When we divide that valuation by the number of coins outstanding (approximately 20 million), that leads to a theoretical Bitcoin price target of $500,000.
Of course, there are no guarantees here that Bitcoin will ever hit such a ridiculously high price target, and the timeline could be long. Yet a price target of $500,000 might actually be on the low side. There are plenty of price forecasts out there suggesting that Bitcoin could hit $1 million by 2030. In fact, Ark Invest now thinks Bitcoin might hit $2.4 million, and a big part of that is due to the digital gold thesis.
If the current tariff situation worsens, and money continues to flow out of dollar-denominated assets, some of that money is almost certainly going to flow into Bitcoin. So, in a strange and surprising way, tariff uncertainty might continue to push the price of Bitcoin higher this year. The cryptocurrency is finally earning its proposed status as an effective hedge against dollar-based market risks.
