Valerio Baselli: Hello and welcome to Morningstar. In just a few years, cryptocurrencies have moved from being a niche segment of the financial world into the mainstream investment conversation, with bitcoin in particular attracting growing attention from institutions and asset managers. At the same time, volatility, regulatory uncertainty, and shifting market narratives continue to divide investors.
To help us understand where cryptos stand today, and where they may be headed, I’m joined by Matt Hougan, he’s chief investment officer at Bitwise Asset Management.
So, Matt, as everybody knows, we’ve had a massive decline in digital currencies’ price since last October. It’s undeniable that bitcoin has delivered strong long-term returns, but with extreme drawdowns along the way. For retail investors who don’t have unlimited patience or capital, why should bitcoin still be considered a serious investment rather than a speculative trade?
Bitcoin is a Disruptive Technology and Digital Gold
Matt Hougan: It’s such a great question. I think the right way to consider bitcoin is to think of it as a disruptive technology. And we’ve all lived through disruptive technologies emerging as serious investments. I started my career as a biotech analyst, which was extremely volatile, extremely questioned around the edges, and it had a lot of volatility, but it paid off the long term. The same has been true in technology, internet stocks, and today, AI.
What bitcoin is about is it’s a disruptive technology that gives us a new way to store wealth in a digital format. It benefits from investors’ long-term rising concerns about debt and debasement. It benefits from the long-term trend of the world going more digitally native. I think those two trends are intact, and as long as that continues, I think the long-term trajectory, despite a lot of volatility along the way, is upward for bitcoin.
Baselli: Well, speaking of that, bitcoin is often described as “digital gold,” yet it’s not commonly used for everyday transactions. So, what ultimately gives bitcoin its value? And why should investors believe that value will persist?
Hougan: It’s actually baked a little bit into your question. You described it as digital gold. That’s how we talk about it as well. We don’t use gold for everyday transactions either. And yet it’s literally the most valuable asset in the world, worth around $30 trillion. Bitcoin is its digital analog. It’s worth a couple trillion dollars, but it’s on the right trajectory. What I think gives bitcoin its value is that it provides a service that the world wants. That service is the ability to store wealth in a digital format without a government or a bank.
And you can see that the Abu Dhabi sovereign wealth fund wants this service, that the Harvard endowment wants this service, that MassMutual wants this service, that Stan Druckenmiller wants this service, that tens of millions of people around the world want this service. People want that service in physical format as well. That is gold. But they increasingly want it in a digital format. As long as people continue to want the service that bitcoin provides, it’ll be worth significant money. And what the trends suggest, what my hunch is, is that more and more people will want this service, the ability to store wealth in a digital format without a government or a bank, that’s increasingly valuable in today’s world. That’s why it will persist and have long value for decades and generations to come.
Bitcoin’s Role in Diversified Portfolio
Baselli: From an investor’s point of view, within a diversified portfolio, allocating to bitcoin means less stocks and bonds. What does bitcoin offer that traditional assets don’t, in your view? And when might it not be worth the trade-off?
Hougan: So, if you strip bitcoin of all the emotion that surrounds it. Because I do think when you say bitcoin to people, it triggers a lot of emotion. And you were just to put on sort of a statistical hat; you would look at an asset that has low historical correlations to stocks and zero correlations to bonds. Right? The correlation to stocks has basically never gone above 0.5 on a 90-day rolling basis. You look at something that has relatively high volatility, historically large returns and is liquid.
From a portfolio construction perspective, that is an incredible asset. What the data shows is there’s actually never been a three-year period where adding bitcoin to a portfolio, if you rebalance like you do with other assets, didn’t boost your risk-adjusted returns. Again, if you stripped the emotion and told someone, do you want a low correlated liquid and high returning asset for your portfolio, they would all say yes. I think people have ignored that statistical data because they aren’t sure it will continue into the future. I think it will.
So why does it have a role in a portfolio? Well, history suggests just like adding a little bit of spice to your stew, it makes the stew taste better. When will it not make sense? I think the biggest risk in crypto is behavioral risk. So, to answer the question of why that doesn’t make sense, if bitcoin has just rallied a huge amount, it’s very risky from a behavioral perspective to add a full position, because the asset could fall 20, 30% at any time. And I’ve seen lots of investors add it at the peak and then panic at the bottom and sell. That’s how you hurt yourself in bitcoin. The solution to that is for most investors, if you’re adding to a bitcoin position, dollar cost average in. So, you avoid that behavioral risk.
The funny thing about crypto is we treat it differently from other assets. If you treat it just like other assets, if you rebalance, if your dollar cost average, if you do a long-term holding strategy, historically it’s been really beneficial to portfolio returns. And I think that it is likely to persist into the future.
What to Expect From Bitcoin in 2026
Baselli: Now, looking at the short term, what do you expect from bitcoin in 2026? And what factors affect your view?
Hougan: The current state of bitcoin is, look its price is set by supply and demand. And in bitcoin you know the supply: every year the bitcoin network right now produces a certain amount of bitcoin. It’s 164,000 bitcoin. Right now, flows into ETFs and purchases by corporations is more than that amount. So net demand from institutional investors is higher than supply. Last year what we saw is existing bitcoin holders were willing to sell some bitcoin because it had gotten up to a nice round number, the $100,000 level. I think what’s happening in the market this year is you have this persistent institutional demand that’s greater than new supply, and then you have retail investors who are still selling because they’re happy to sell bitcoin at $100,000.
Eventually, over time, we’re going to plow through those retail sellers, and the net institutional demand will overwhelm that supply coming from those retail sellers. So, my long-term forecast is strongly positive. I do think we could chop sideways for six months, nine months as we work through those people who want to sell at the hundred-thousand-dollar level. But as long as the institutional demand is there, eventually we will wear that down. And I think it’ll be up by the end of the year.
Baselli: On the other hand, if we revisit this conversation in five years, what would need to have happened for you to say that bitcoin clearly succeeded, or failed, as a long-term investment?
Hougan: Look, I would like to see bitcoin become a significant portion of the store value market. Right now, it’s about one tenth of that market. In other words, gold is about 10 times the size of bitcoin. In five years, I would like it to become, you know, a third or half that market. And so, continue to eat into the physical market. In order to get there, we’re going to continue to need a positive regulatory environment. We are in a positive regulatory environment around the world. We’re going to need people to still be worried about debt and debasement. I’m pretty sure that’s going to be true, because governments continue to run very high budget deficits and to print money all around the world. As long as we have those two factors in place. I think what’s happened over the last 15 years is going to continue to happen.
Look, when you enter this industry, you know this, they teach you, teach you that the most costly words in finance are “this time it’s different.” I think that’s still true with bitcoin. I don’t think the next 10 years will be that different from the last 10. I think bitcoin is in this path of building its role into sort of modern portfolios. We see that at the institutional level, the financial advisor level and the retail level, I think that trend will persist for the next 10 years. So, if we come back in 10 years and we’re half the size of gold or three quarters, the size of gold, or maybe even bigger than gold, then I think bitcoin will have done well.
What Are the Risks in Investing in Bitcoin?
Baselli: Interesting. Finally, what are the most important risks or uncertainties that investors should be thinking about when allocating to bitcoin or crypto assets?
Hougan: Yeah, by far the biggest risk is the one I touched on earlier, which is behavioral risk. It’s not technology risk destroying early proven. I don’t even think it’s adoption risk. That trend has been in place for the last decade plus. I think it’s behavioral risk of you as an investor. Bitcoin is probably the most volatile asset that most investors will own. That means when the price is going up, it feels really good. And we see people piling in at sizes in their portfolio that don’t make sense, right? 10, 20, 30% of their portfolio. And then when the pullback comes, they panic and sell and lock in those losses. That’s not what bitcoin is for.
Look, I’m in this 24 over seven 365, I can’t tell you where bitcoin is going over the next month. But I have a lot of confidence in where it’s going over the next 10 years. And so, your investment allocation should fit that sort of time frame. That means size your portfolio appropriately. The average bitwise investor has about 2.5% of their portfolio in bitcoin. Hold for the long haul and rebalance. If you do that you can avoid the behavioral risk, which is the biggest single risk in this space.
Baselli: Thank you so much for your time, Matt. For Morningstar, I’m Valerio Baselli, thanks for watching.
