Bitcoin ETFs bring in a new investor who bucks the ‘HODL’ culture and rebalances as bitcoin soars

Crypto’s culture encourages investors to “HODL,” or hold on for dear life, in the rollercoaster ride of bitcoin‘s extreme fluctuations.

But this long-prized practice may diminish as adoption of ETFs grows, particularly if traditional investors who are accustomed to rebalancing their portfolios regularly add in bitcoin exposure.

The cryptocurrency has become increasingly institutionalized in recent years and since the launch of exchange traded funds this year that track bitcoin’s price, that trend is expected to increase – especially as different wirehouses, brokerages, and advisors start to turn on client access to the ETFs.

“You have so many people in this community who are just diamond-handed holders,” Donald Marron, director of economic policy initiatives at Urban Institute, said this week at 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 you were on those roads to a much higher bitcoin price.”

“If you have people who are actually doing what I view as traditional asset allocation, they’re going to face a question every quarter, every month, every year about whether they rebalance,” he added. “From a risk management point of view, rebalancing is a good thing. But rebalancing also means that they’re going to be sellers along this journey.”

At some point, every HODLer becomes a seller, according to Julio Moreno, head of research at CryptoQuant. At the moment, long-term holders are selling, as is normal during bull markets, after accumulating bitcoin during the bear market.

Matt Hougan, chief investment officer at Bitwise Asset Management, the issuer of the Bitwise Bitcoin ETF (BITB), said investors should treat bitcoin “like any other asset … add it into a portfolio and include the rebalancing process” – pointing to bitcoin’s traditional four-year cycle of three good years followed by a down year.

“Bitcoin has has boom and bust cycles,” he said, speaking at the Vision conference, a crypto investing forum for advisors hosted by the Digital Assets Council of Financial Professionals. “When you add rebalancing to your portfolio, the impact on ‘sharpes’ and other measures increases dramatically.”

Sharpe ratios help investors assess the return they get from an investment relative to the amount of risk they take.

Rebalancing may help dampen bitcoin’s notorious volatility – one of the biggest things keeping many investors away from the asset, according to Michael Allegue, an investment officer at MassMutual.

“As more and more institutional capital comes in, there’s potential for volatility dampening as many other firms, us included, are probably going to be rebalancing accounts – they’re not going to be purely buy-and-hold,” Allegue said.