Bitcoin cements ‘legitimate’ status as Wall Street struggles toward a new consensus: Morning Brief

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BlackRock (BLK) CEO Larry Fink used harsh words for the cryptocurrency market in an interview with CNBC on Monday.

“As you know, I was a skeptic,” Fink told CNBC’s Jim Cramer. [about bitcoin]”

“I was a proud skeptic,” Fink added. “And I studied it, I learned, and I came away saying, ‘My opinion from five years ago was wrong. Here’s my opinion today: I believe in today’s opportunity.’ I believe Bitcoin is legitimate.”

For some in the crypto community, these words from the CEO of the world’s largest asset manager will be just that: the words of a financial powerhouse. They never needed confirmation from Fink or anyone else.

For others, these comments are an important step toward including bitcoin (BTC-USD) and cryptocurrencies more generally in the same discussion as stocks, bonds, and other accepted components of a balanced portfolio.

Fink later spoke about Bitcoin’s role as a hedge against currency depreciation and financial instability, saying, “I believe there is a role for Bitcoin in portfolios… I see it as digital gold.”

Larry Fink on stage at the 2022 New York Times DealBook on November 30, 2022 in New York City. (Thos Robinson/Getty Images for The New York Times) (Thos Robinson via Getty Images)

On BlackRock’s earnings call Monday morning, Fink said the company’s bitcoin ETF, the iShares Bitcoin Trust (IBIT), saw net inflows of $4 billion in the second quarter and $18 billion in its first six months. Fink added that the fund was “third-highest” [grossing] “The most traded stock market product in the industry this year.”

So there are many reasons to find the legitimacy of existence.

But to dismiss Fink’s optimism about Bitcoin as a superficial sales pitch for an ETF that carries higher fees than many major stock and bond ETFs misses the current pressures facing portfolio managers and the potential upside Bitcoin could provide.

As we wrote last week, the concentration in the S&P 500 has made the phrase “stock market” less meaningful than ever. The S&P 500 is also called a “benchmark index,” but its promise of providing a consensus benchmark for investors in the market doesn’t feel the same anymore.

Strategists who have raised price targets on the index have done so with hesitation. On July 2, Lori Calvasina, head of research on U.S. equity strategy at RBC Capital Markets, said her team’s decision to raise the S&P 500 price target to 5,700 from 5,300 was a “nervous upgrade.”

The story continues

The S&P 500 is up 46% since the start of 2023. That’s great news for many small investors who put most of their investments in diversified stock index funds. For institutions, the stock market rally poses a challenge.

A 2022 Fidelity study found that nearly a quarter of the average institution’s assets are held in alternatives — things like private equity, private credit, venture capital, etc. And the company found that nearly half of the investors it surveyed said their exposure to that asset class will increase in the coming years.

Meanwhile, the average institution’s allocation to publicly traded stocks was 43%. For advisors — or those managing portfolios for individuals — the allocation to stocks was 62%.

Institutional investors face pressures that go far beyond those faced by the average saver, such as ensuring that a private university’s endowment has the liquidity to meet operational needs and support future capital projects as it grows through investment.

These investors also struggle with any kind of mandatory restrictions. Stocks often go up, but it’s not often that the “stock market”—the S&P 500—is a valuable North Star for many on Wall Street.

But in market environments like today, when the AI ​​craze has put a relentless bid against large-cap U.S. stocks, the S&P 500 is hitting dozens of record highs, and cash yields are still above 4%, many institutions are left in the unenviable position of posting returns that lag behind “market” returns.

In this regard, Fink’s Bitcoin supporters remind professional investors of Harry Markowitz’s famous claim that the only free lunch in investing is diversification.

“This is a legitimate financial instrument that allows you to get uncorrelated, uncorrelated returns,” Fink said.

A simplified version of Markowitz’s argument says that adding more uncorrelated assets to a portfolio, that is, assets that do not increase or decrease simultaneously, can increase returns without adding risk.

This is where Bitcoin opens the door.

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