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Bitcoin ETFs Challenge 'HODL' with Rebalancing

Bitcoin's "HODL" culture faces a shakeup with the rise of bitcoin ETFs. As traditional investors join the crypto scene
June 9, 2024

The cryptocurrency world is known for its "HODL" philosophy—holding on for dear life through bitcoin's wild price swings. This steadfast approach has long been a cornerstone for crypto enthusiasts. However, the rise of exchange-traded funds (ETFs) tracking bitcoin's price might reshape this mindset, especially as traditional investors accustomed to regular portfolio rebalancing start incorporating bitcoin.

In recent years, bitcoin has gained substantial traction among institutional investors. The launch of bitcoin ETFs this year marks a significant step in this institutionalization, as more wirehouses, brokerages, and financial advisors begin offering clients access to these funds.

"You have so many people in this community who are just diamond-handed holders," said Donald Marron, director of economic policy initiatives at Urban Institute, during the 2024 Vision conference in Austin, Texas. "If you convince them to allocate 1% [to bitcoin] today and never touch it, they would see enormous wealth gains if bitcoin prices surge."

Marron also highlighted the challenge traditional investors face with bitcoin. "From a risk management perspective, rebalancing is essential. But it also means these investors will sell along the way," he explained.

Julio Moreno, head of research at CryptoQuant, noted that even the most steadfast HODLers eventually sell, particularly during bull markets after accumulating bitcoin during bear markets.

Matt Hougan, chief investment officer at Bitwise Asset Management, which issued the Bitwise Bitcoin ETF (BITB), urged investors to view bitcoin like any other asset. "Incorporate it into your portfolio and include the rebalancing process," he said, pointing to bitcoin’s typical four-year cycle of three strong years followed by a down year. "Rebalancing can significantly enhance performance metrics like Sharpe ratios."

Sharpe ratios measure the return on an investment relative to the risk taken, and rebalancing can help mitigate bitcoin's notorious volatility—a key concern for many investors. Michael Allegue, an investment officer at MassMutual, echoed this sentiment. "As more institutional capital flows into bitcoin, there's potential for reduced volatility because firms will be rebalancing their accounts rather than just buying and holding."

As bitcoin ETFs gain popularity, the traditional HODL strategy may evolve, potentially leading to a more balanced and less volatile market. This shift could attract a broader range of investors, further integrating bitcoin into mainstream financial portfolios.

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