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

The culture of cryptocurrency encourages investors to “HODL,” or hold on for dear life, despite the volatile nature of bitcoin.

However, as ETF adoption grows, this long-cherished practice may decline, especially if traditional investors who are accustomed to rebalancing their portfolios on a regular basis add bitcoin exposure.

The cryptocurrency has become increasingly institutionalized in recent years, and this trend is expected to continue, particularly as various wirehouses, brokerages, and advisors begin to provide client access to the ETFs.

“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, speaking 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 stated. “Rebalancing is a good risk management strategy. However, rebalancing implies that they will be sellers throughout this journey.

Julio Moreno, head of research at CryptoQuant, believes that every HODLer will eventually become a seller. Long-term holders are currently selling bitcoin, as is customary in bull markets, after accumulating it during the bear market.

According to Matt Hougan, chief investment officer at Bitwise Asset Management, the issuer of the Bitwise Bitcoin ETF (BITB), investors should treat bitcoin like any other asset, adding it to a portfolio and including the rebalancing process. He cited bitcoin’s traditional four-year cycle of three good years followed by a down year.

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

Sharpe ratios assist investors in determining the return on an investment in relation to the level of risk they assume.

According to Michael Allegue, an investment officer at MassMutual, rebalancing may help to reduce bitcoin’s notorious volatility, which is one of the main reasons why many investors avoid the asset.

“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 stated.