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BlackRock Research Report: Rising Government Debt and Fiscal Deficits Are Bullish for Bitcoin

Authors | Will Su, Head of Digital Assets Research at BlackRock; Robert Mitchnick, Head of Digital Assets at BlackRock

Translated by | Wu Blockchain

Original link:

https://www.blackrock.com/us/financial-professionals/literature/whitepaper/re-underwriting-bitcoin.pdf

TL;DR:

· BlackRock believes that the long-term rationale for Bitcoin as a global monetary alternative and a portfolio diversification tool has not fundamentally changed.

· Amid rising government debt and persistent fiscal deficits, Bitcoin’s code-enforced fixed supply positions it as a potential hedge against currency devaluation and the erosion of fiat purchasing power.

· Over the past decade, the average correlation coefficient between Bitcoin and the S&P 500 has been approximately 0.18, indicating that long-term correlation remains low; short-term co-movement with risk assets is largely a transient phenomenon.

· Bitcoin’s monthly returns exhibit significant positive skewness, with substantial upside potential offering diversification benefits to portfolios heavily weighted in equities.

· As futures, options, spot ETPs, and arbitrage and hedging instruments develop, Bitcoin’s market structure continues to mature. While long-term volatility shows an overall downward trend, sharp fluctuations triggered by leveraged liquidations have not been entirely eliminated.

· BlackRock backtesting indicates that allocating 1% to 2% of the equity portion of a traditional 60/40 stock-bond portfolio to Bitcoin has historically enhanced returns and risk-adjusted performance, while keeping overall portfolio risk and maximum drawdowns broadly consistent with the original allocation.

· BlackRock emphasizes that Bitcoin remains a high-volatility asset. Allocation ratios should be tailored to investors’ individual objectives, risk tolerance, and regulatory requirements. Historical backtests do not guarantee future performance.

In its latest report, "Re-Underwriting Bitcoin: Still a Portfolio Diversifier After the Pullback?", BlackRock reassesses Bitcoin’s role in institutional portfolios. The report argues that although Bitcoin remains a high-volatility asset, its long-term rationale as a global monetary alternative and portfolio diversification tool has not fundamentally changed.

BlackRock primarily discusses Bitcoin’s long-term investment value across five dimensions: its potential as a hedge against currency devaluation, its low long-term correlation with traditional assets, its positively skewed return distribution, its gradually declining long-term volatility, and its increasingly mature market infrastructure.

Rising government debt reinforces the allocation logic for scarce assets

BlackRock believes that one of the key reasons Bitcoin attracts institutional investors is its emerging status as a potential global monetary alternative.

Rising government debt and fiscal deficits in the U.S. and globally have heightened investor concerns about long-term risks associated with monetary expansion, fiat currency depreciation, and declining purchasing power. If major economies struggle to identify credible paths for fiscal consolidation, the strategic value of assets with supplies not subject to central bank discretion may rise further.

Gold's scarcity stems primarily from geological conditions and mining costs, whereas Bitcoin's scarcity is enforced by mathematical rules and code constraints. Although their historical track records and market sizes differ significantly, both share the characteristic of limited supply that cannot be arbitrarily increased by governments or central banks.

To illustrate this point, the report reviews the performance of fiat currencies relative to gold over the past century. BlackRock notes that wars and economic turbulence in the first half of the 20th century triggered multiple rounds of inflation, continuously eroding the real purchasing power of paper money. The Bretton Woods system, established in 1944, subsequently collapsed, leading to the decoupling of major currencies from gold and further depreciation of fiat currencies against the precious metal.

Measured in gold terms, fiat currencies issued by major economies at the beginning of the 20th century have lost more than 99% of their value to date. In economies such as Turkey, Argentina, Brazil, and Russia, the decline in currency purchasing power has been even more severe, with some countries experiencing repeated episodes of high inflation, hyperinflation, and currency resets.

BlackRock believes that although Bitcoin was only launched in 2009 and has a much shorter history than gold, it has gradually gained market recognition as a global alternative to fiat currency. For investors concerned about long-term currency depreciation, Bitcoin's fixed supply mechanism constitutes one of its core investment rationales.

Bitcoin's long-term performance is linked to the direction of global liquidity.

The report also analyzes the relationship between Bitcoin and the global money supply. Over the past decade, Bitcoin's performance has generally shown some correlation with changes in the money supply of major economies, tending to perform strongly when the growth rate of global M2 accelerates.

The global M2 data used in the report covers the United States, the Eurozone, China, Japan, and the United Kingdom. M2 typically includes cash in circulation, demand and savings deposits, money market funds, and certain time deposits, serving as a metric to observe the scale of money and liquidity within the financial system.

BlackRock also points out that this correlation has not remained stable across all periods. Bitcoin's short-term performance is also influenced by factors such as market positioning, leverage levels, capital flows, and liquidity conditions. Therefore, global M2 should not be viewed simply as a direct predictor of Bitcoin prices.

However, over longer time horizons, Bitcoin's value performance tends to align with the direction of liquidity in the global financial system. This implies that beyond its attributes as a digitally scarce asset, Bitcoin may also be influenced in the long term by changes in the global monetary environment.

Bitcoin returns exhibit a more pronounced positive skew.

BlackRock believes that Bitcoin's value to a portfolio stems not only from its higher historical returns but also from its return distribution, which differs from that of equities, bonds, and gold.

The report compares monthly returns over the past decade. The results show that Bitcoin's monthly return distribution has a more pronounced positive skew than other major asset classes. This means that while months with significant gains may not occur frequently, when they do, the magnitude of the returns is typically substantial.

In contrast, equities tend to experience more frequent but smaller gains, punctuated by occasional sharp declines. Bitcoin, on the other hand, is more prone to significant upside tail returns. This distinct return distribution suggests that Bitcoin could serve as a complement to portfolios with a high allocation to equities.

However, positively skewed returns do not imply lower risk for Bitcoin. Bitcoin can still undergo significant drawdowns, and its historically higher returns have been achieved amid higher volatility. Therefore, BlackRock emphasizes that the actual allocation to Bitcoin should align with an investor's risk tolerance.

Long-term correlation with US equities remains at a low level.

Beyond return distribution, BlackRock also focused its analysis on the correlation between Bitcoin and traditional assets.

Report data shows that over the past decade, the average correlation coefficient between Bitcoin and the S&P 500 Index was approximately 0.18. This level is higher than that of gold and US investment-grade bonds, but significantly lower than the correlations of commodities, emerging market equities, and US high-yield bonds with US stocks.

This implies that, based on long-term historical data, Bitcoin prices have not consistently moved in sync with the stock market, suggesting it may play a certain diversification role in multi-asset portfolios.

BlackRock acknowledges that Bitcoin exhibits higher correlation with risk assets during certain short-term periods. For instance, Bitcoin may fall alongside equities during times of tightening macro liquidity, a rapid decline in market risk appetite, or concentrated deleveraging. However, the report argues that such spikes in correlation are largely episodic rather than indicative of a structural shift in Bitcoin's long-term characteristics.

The report compares the underlying investment thesis of Bitcoin with that of gold, suggesting that both can be viewed as global monetary alternatives used to hedge against risks such as inflation, geopolitical turmoil, and declining trust in fiat currencies. Even gold, typically regarded as a low-correlation safe-haven asset, has briefly exhibited higher correlation with equities during exceptional periods such as the pandemic and shifts in monetary policy.

Therefore, a short-term rise in correlation alone is insufficient to negate an asset's diversification role within a long-term investment portfolio.

Bitcoin may serve as a hedge following certain geopolitical shocks.

BlackRock also compared the performance of Bitcoin, gold, and the S&P 500 Index following multiple major geopolitical and financial shocks, including the COVID-19 pandemic, the disputed 2020 U.S. election, the Russia-Ukraine conflict, the U.S. regional banking crisis, and changes in global trade policies.

The report found that Bitcoin does not immediately behave as a safe-haven asset during all sudden events. In the initial phase of a shock, market demand for liquidity can lead to simultaneous declines in various assets, including Bitcoin and gold.

However, in the weeks or months following certain events, Bitcoin has outperformed both equities and gold. Based on this, BlackRock believes that Bitcoin may provide some hedging benefits when the global political and financial order is under stress, but this effect is unstable and should not be simply equated with traditional immediate safe-haven assets.

In other words, Bitcoin exhibits a certain 'dual nature': it may trade like a high-risk asset during concentrated market deleveraging, yet display characteristics of a global monetary alternative when investors focus on monetary systems, capital flows, or geopolitical risks.

Maturing market structure drives long-term decline in volatility

BlackRock stated that while Bitcoin remains highly volatile by traditional financial asset standards, its long-term volatility has significantly decreased.

A decade ago, Bitcoin's annualized volatility frequently exceeded 100%; with the expansion of market size and improvement in trading infrastructure, overall volatility in recent years has dropped significantly compared to earlier periods. The report argues that this change is not accidental, but rather the result of the continuous maturation of Bitcoin's market structure.

In the early days, the Bitcoin market was primarily dominated by offshore spot exchanges and retail capital. Market liquidity was weak, and buy and sell orders were imbalanced, leading to recurring cycles of rapid price surges, liquidity dry-ups, and concentrated liquidations.

Since then, Bitcoin has gradually established a more comprehensive financial market infrastructure: perpetual futures emerged in 2016; regulated CME Bitcoin futures were launched in 2017; CME Bitcoin options were introduced in 2020; and US spot Bitcoin ETPs and related option products were launched in 2024.

As the spot, futures, options, and ETP markets have developed in tandem, institutional investors now have access to a wider array of tools for arbitrage, hedging, and risk management. Cross-market trading has enhanced two-way liquidity and improved the Bitcoin market's capacity to absorb large transactions and price shocks.

BlackRock believes that this maturation of market structure is a key driver behind the long-term decline in Bitcoin's volatility. Meanwhile, high-leverage products such as perpetual futures can still trigger periodic cascading liquidations, meaning extreme volatility will not disappear entirely. However, compared to the early days, the Bitcoin market's ability to handle large-scale price dislocations and capital flows has significantly strengthened.

Traditional 60/40 portfolios face new diversification challenges

The report further evaluates Bitcoin within the context of traditional investment portfolios.

BlackRock points out that the traditional 60/40 stock-bond portfolio is facing increasingly complex diversification challenges. Historically, stocks and bonds often provided some degree of mutual hedging; however, in recent years, their correlation has risen during certain periods, weakening the diversification benefits of traditional stock-bond portfolios.

At the same time, returns in US equity indices are becoming increasingly concentrated in a few large companies. Significant volatility in these heavily weighted stocks could materially impact the entire equity portfolio. Therefore, investors need to seek assets whose return drivers differ from those of stocks and bonds.

Given Bitcoin's historically low correlation with US equities and its distinct return distribution, BlackRock believes that a small allocation to Bitcoin could serve as a complementary diversification tool within traditional investment portfolios.

An allocation of 1% to 2% may already produce a noticeable impact.

BlackRock conducted a ten-year historical backtest on the traditional US 60/40 portfolio. The benchmark portfolio consists of 60% S&P 500 Index and 40% US Aggregate Bond Index.

In the first scenario, BlackRock reallocates 1% from the equity portion, resulting in a portfolio of 59% equities, 40% bonds, and 1% Bitcoin; the second scenario results in a portfolio of 58% equities, 40% bonds, and 2% Bitcoin.

The backtest results show that adding 1% to 2% Bitcoin historically enhanced the portfolio's annualized returns and risk-adjusted returns, while keeping overall risk levels and maximum drawdowns broadly consistent with the original 60/40 portfolio.

The historical Sharpe ratio of the traditional 60/40 portfolio is 0.81; it rises to 0.90 with a 1% Bitcoin allocation, and further increases to 0.96 with a 2% Bitcoin allocation. The maximum drawdowns for the three portfolios during the backtest period were approximately 20.3%, 20.6%, and 20.9%, respectively, indicating relatively limited differences.

These data suggest that due to Bitcoin's high inherent volatility, even a small allocation can have an observable impact on the return and risk characteristics of an investment portfolio. Therefore, BlackRock's discussion focuses not on large-scale Bitcoin allocations, but on its role as a small-scale satellite asset within traditional portfolios.

However, the report also emphasizes that these results are hypothetical backtests based on historical data using hindsight information, and do not represent future performance. Investors should still decide whether to allocate to Bitcoin and determine the allocation size based on their own investment objectives, risk tolerance, and regulatory constraints.

Summary

BlackRock believes that Bitcoin is gradually evolving from a highly volatile asset dominated by overseas exchanges and retail trading into a mature asset class with complete infrastructure, including spot, futures, options, and ETPs.

The long-term investment thesis for Bitcoin is primarily built on several factors: scarcity driven by fixed supply, potential hedging against currency devaluation and declining fiat purchasing power, low long-term correlation with traditional assets like equities, a positively skewed return distribution, and a trend of decreasing volatility driven by market structure maturation.

Therefore, BlackRock believes that Bitcoin can still play a diversification role in investment portfolios. It is not a low-risk asset, nor does it consistently serve as a safe haven during every market shock; however, historical long-term data suggests that a small Bitcoin allocation may enhance returns and risk-adjusted returns without significantly altering the portfolio's overall risk profile.

The report ultimately emphasizes that the decision to allocate to Bitcoin and the specific allocation percentage should depend on investors' individual objectives, risk tolerance, and applicable regulatory requirements. The aforementioned historical performance and backtest results do not constitute a guarantee of future returns.

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