In the realm of cryptocurrency investment, a distinct preference for Bitcoin-centric companies has emerged among a segment of investors driven by various factors, including philosophical beliefs and concerns over anonymity. Companies like Relai cater to such investors by offering Bitcoin transactions without the need for Know Your Customer (KYC) procedures for purchases up to a certain limit daily.

This inclination towards Bitcoin-only platforms also stems from regulatory considerations, as other digital currencies risk being classified as securities by authoritative bodies like the SEC. Notably, recent legal developments have stirred the crypto community, especially following the SEC’s case concerning XRP. This article provides an overview of several Bitcoin-only exchanges and services that prioritize privacy, security, and adherence to the core values of Bitcoin maximalism, alongside insights into unique investment avenues like purchasing directly from miners.

Some investors want to work exclusively with companies that only handle Bitcoin transactions. This is often due to philosophical reasons, such as “Bitcoin Maximalism.” However, this preference may also stem from a desire to stay completely anonymous. The Bitcoin-only company Relai allows individuals to buy up to $1,000 per day without doing any KYC.

Another reason that investors may prefer Bitcoin-only companies is risk-reduction. Other digital assets are considered securities by the Securities Exchange Commission in the U.S. Since alternative digital assets “alt-coins” may be securities, the exchanges that sell them are violating the Securities Act for selling unregistered securities.

It is important to note that the SEC lost its case against the alt-coin XRP in 2023. In July, the United States Southern District Court of New York found that XRP (and thus cryptocurrency) was not a security when sold to the public on an exchange.

“In November 2023, we sold around 800 BTC with a trading volume of around 25 million EUR. We are currently selling around 25 BTC per day, with around 1m EUR trading volume per day on average.” Julian Liniger, CEO of Relai

An alternative to buying Bitcoin from an exchange, OTC desk, or broker is to buy directly from the miners that secure the Bitcoin network. Bitcoin miners can sell “clean” Bitcoin to investors who want to own Bitcoin with no transaction history. The demand for clean Bitcoin may increase if regulators continue to blacklist certain wallet addresses and mixing technologies. 

The landscape of cryptocurrency investing is increasingly accommodating investors who prefer to deal exclusively with Bitcoin, underpinned by a blend of philosophical, privacy, and regulatory considerations. Platforms like Relai and River have positioned themselves as leaders in this niche, offering services tailored to the needs of Bitcoin maximalists and those seeking to mitigate regulatory risks associated with altcoins.

Despite the challenges posed by the evolving regulatory environment, as evidenced by the notable case against XRP, these Bitcoin-only entities provide a secure and compliant avenue for investors. Furthermore, the option to purchase “clean” Bitcoin directly from miners presents an intriguing opportunity for investors looking to bypass traditional exchanges altogether, highlighting the diverse strategies within the Bitcoin ecosystem designed to meet the demands of a broad investor base.

Understanding the true cost of trading Bitcoin in a fragmented and often opportunistic market can be complex. This article explores why prices vary significantly across different cryptocurrency marketplaces, including centralized exchanges (CEXs), liquidity providers (LPs), and decentralized exchanges (DEXs). It addresses the lack of an official consolidated best bid and offer (BBO) for crypto assets and how some market participants prioritize profit over best execution.

What Is the cost to trade Bitcoin & other crypto assets? The question sounds simple, but alas, it is not, with the vast majority of current markets ignoring other participants & trading at prices which are often higher or lower than other markets display.   There are several reasons for this phenomenon:

• A perceived lack of data — there is no “official” consolidated best bid and offer (BBO) for crypto assets.
• Market Fragmentation — there are many marketplaces including centralized exchanges (CEXs), liquidity providers (LPs) and decentralized exchanges (DEXs) with conflicting price oracles.
• Opportunism — many market agents ignore “best execution” responsibilities to their clients in favor of maximizing profits from payment for order flow (PFOF) arrangements and keeping their costs down.

Our goal at CoinRoutes, in addition to helping investors navigate this market to achieve best execution, is to provide data to help investors & trading firms understand the market.  We can provide context, despite the fragmentation, for understanding the cost of trading in terms that traditional institutional traders will be comfortable with.  To that end, we have developed a consistent metric we call the CoinRoutes Liquidity Index.  To understand why we constructed the index, however, it is useful to look at some raw data that shows trading costs across the major centralized crypto exchanges. 

This chart shows the cost to buy and sell $25,000, $100,000, $250,000, $500,000 and $1,000,000 of Bitcoin in US Dollars from February through November of 2023:

As can be seen in this chart, there is a small persistent negative cost for $25,000 orders that became very large during some of the periods earlier this year.  The persistent negative cost results from price discrepancies across exchanges where the bid on one exchange is often higher than the offer.  Traditional financial markets would call these “crossed markets” which are very rare in most asset classes, but almost always exist in digital assets.  It is worth noting, however, that most of the time, those differences are lower than the costs to move assets between exchanges and arbitrage away the difference.  There are, however, often meaningful differences during periods of high volatility.  Such price discrepancies can create a distorted view of the potential cost to trade.   As a result, we created the CoinRoutes liquidity index to normalize the data and provide traders with a consistent and fair benchmark for understanding the cost of liquidity. 

To calculate the CoinRoutes Liquidity Index, we measured the cost differential between $25k orders and $1 million orders based on optimal “smart routing” for buying and selling at each size.  This is calculated by “walking the book”, as CoinRoutes holds the full order book of all major exchanges in memory.  The calculation uses that order book to add up the cost for selling at all bids, ranked in order of highest to lowest to achieve a $1 million sale and the cost of buying from all offers, ranked from the lowest to the highest to achieve a $1 million buy.   We then calculated time weighted averages from 5 second samples every day.   It is important to note that this benchmark assumes optimal order routing, meaning it assumes all exchanges were available for trading at all times, with sufficient inventory of dollars, stablecoins or tokens.  As a practical matter, this requires access to sophisticated routing technology and superior treasury management.  As a result, this is a difficult benchmark for most institutions to replicate without spending on infrastructure or paying a vendor.  It is, however, an accurate and fair method to measure the cost of liquidity, before markups or fees that most liquidity providers may charge.

CoinRoutes Liquidity Index Results:

CoinRoutes calculated the index from February through the end of November of 2023 for Bitcoin & Ether denominated in US Dollars, in USDT (Tether) and for Perpetual Swaps for both also denominated in US Dollars and USDT.   There are several important conclusions:

1) Costs for trading Bitcoin and Ethereum in institutional size are quite competitive with global equities of similar market capitalizations, if the institution is able to access all markets.  (Retail investors in Bitcoin and Ethereum pay much more, which is quite different than equity markets where such traders pay extremely small spreads, often with no fees) 

2) USDollar spot transactions are more expensive than USDT (Tether) spot trades.  While this trend has moderated somewhat over the year, it is still statistically significant.

For Bitcoin, over the last quarter, the dollar cost for $1 million in liquidity averaged between 5 and 7.5 basis points, while the USDT cost for $1 million in liquidity averaged between 3.5 and 5.5 basis points with some more volatility.

For Ethereum, over the last quarter, the dollar cost for $1 million in liquidity averaged between 5 and 9 basis points, while the USDT cost for $1 million in liquidity averaged between 4 and 8 basis points.

3) There is more liquidity & lower cost to transact in perpetual swaps than in spot.  This is unsurprising, as reported volumes on the swaps market are significantly larger than spot, but the order book data backs this up.  This also explains why OTC trading is so popular in the spot market, as the market makers are able to hedge in the perpetual swaps market to create tight spreads.

For Bitcoin, the perpetual swap cost for $1 million in liquidity averaged between 3.5 and 7 basis points for the USD denominated swaps and between 1 and 2.5 basis points for the USDT denominated swaps.

For Ethereum, the perpetual swap cost for $1 million in liquidity averaged between 4 and 8 basis points for the USD denominated swaps and between 2 and 3.5 basis points for the USDT denominated swaps.

This first chart show the liquidity cost to buy or sell $1million of Bitcoin in US dollars across the major crypto exchanges.  Note that during the spring and again in the early summer there were spikes, predominantly on weekends when banking issues made moving money across exchanges difficult, but the average has settled into a range between 5 and 7.5 basis points.   As this measures the cost for each, it implies an average bid / offer spread of between 10 and 15 basis points for US dollar based liquidity, which is similar to what anecdotal evidence suggests is an average spread for institutional size. 

In conclusion, navigating the fragmented cryptocurrency market to achieve best execution is fraught with challenges, from varying prices across exchanges to opportunistic behaviors by market participants. This article has highlighted the complexities and the persistent price discrepancies that can distort the perceived cost of trading.

The CoinRoutes Liquidity Index emerges as a crucial tool, offering a standardized benchmark that helps traders understand the real cost of liquidity. While achieving optimal order routing and superior treasury management may be difficult without significant investment, the index provides a fair and accurate method to measure trading costs, paving the way for more informed and effective trading strategies in the digital asset space.

This article delves into the complexities and opportunities surrounding Bitcoin’s integration into financial portfolios, a topic that has intrigued and perplexed many financial advisers. Despite Bitcoin’s impressive historical performance, its adoption is often hindered by concerns over volatility and perceived risks, as well as a lack of understanding and infrastructure.

However, as leading investors and institutions increasingly recognize the benefits of cryptocurrencies, it signals a shift toward embracing Bitcoin for enhanced returns and diversification. The discussion further explores methods of acquiring Bitcoin, particularly through centralized exchanges (CEX), while addressing the associated trade-offs and potential solutions such as off-chain settlement to mitigate risks.

Given Bitcoin’s historical performance, the key question is, why haven’t more financial advisers incorporated it into their portfolios? The answer often lies in the volatility and perceived risks associated with cryptocurrencies, along with a lack of understanding and infrastructure to handle such assets.

However, as the world’s leading investors and institutions gradually embrace Bitcoin and the broader cryptocurrency domain, it clearly indicates its potential to enhance returns and offer diversification benefits.

For institutional investors who opt to buy Bitcoin directly, the first question is, “Where should I buy Bitcoin?” Although we cannot give financial advice in this report, we can provide information on the largest centralized exchanges, OTC desks, and brokers that sell Bitcoin to institutional investors around the world. 

The most popular method for first acquiring Bitcoin is likely a centralized exchange or CEX. These exchanges generally require Know Your Customer (KYC) information so that governments can have a way to find individuals for tax and Anti-Money Laundering (AML) purposes. The largest Bitcoin exchanges are typically ranked based on their trading volume, liquidity, and overall user base. However, it’s important to note that the rankings can vary over time due to changes in market dynamics, regulatory environments, and other factors. The annual revenue for Kraken is not published since the company is held privately; however, the SEC mentioned an annual revenue of $43 billion between 2020 and 2021 in their public complaint against Kraken in 2023. The research team at Cointelegraph suspects that this number was mistyped and that the figure reported by the Karens at the SEC may refer to volume. As of December 2023, the top Bitcoin exchanges include:

While CEX can be a convenient way to accumulate Bitcoin, one needs to be aware of trade-offs. 

1. While you may have a Bitcoin address on a CEX, the private keys are not only exclusively known to you. Meaning that your BTC can be withheld from you for whatever reason. This includes not processing your transactions promptly and your account being locked out for various reasons – let’s say you lost your password or the email address you usually log in with. Customer service can take a long time, and you do not have access to your Bitcoin. 
2. If the CEX you are using does not have proof of reserves, you do not know how the CEX is using your Bitcoin. Proof of reserves means the CEX has a third-party audit to ensure that the assets the CEX says are on their books are on their books. Celsius famously rehypothecated (sold the same asset multiple times) to help provide a scheme to produce yield for its users, which ultimately backfired and caused significant market issues. 

A potential solution to the risks associated with buying Bitcoin from exchanges is off-chain settlement. The off-exchange settlement allows institutions and investors to mitigate counter-party risk and increase capital efficiency. The biggest exchanges are launching their own custodians with this technology already enabled. The custodian, the biggest provider of off-chain settlement technology, Clear Loop, is Copper, which is based in the UK. 

In conclusion, the journey toward incorporating Bitcoin into financial portfolios is marked by both significant opportunities and notable challenges. While the appeal of enhanced returns and diversification is strong, the volatility and risk perceptions surrounding Bitcoin require careful navigation. This article has highlighted the evolving landscape where institutional investors are gradually accepting cryptocurrencies, along with practical considerations for purchasing Bitcoin through centralized exchanges.

Moreover, the potential of off-chain settlement offers a promising solution to mitigate risks associated with these transactions. As the financial world continues to adapt, Bitcoin’s role in diversified portfolios seems poised for growth, reflecting broader trends in asset management innovation.

In the evolving landscape of asset management, this article explores Bitcoin’s emergence as a critical component within global investment portfolios. Amid diminishing returns from traditional assets and rising inflation threats, Bitcoin’s integration into the classic 60/40 portfolio model symbolizes a strategic adaptation to these shifts. This piece highlights the growing recognition of cryptocurrencies’ value by institutional investors and presents empirical evidence from leading financial studies to understand this trend.

The comprehensive analysis presented in this chapter underscores a significant paradigm shift in asset management, highlighting the growing importance of Bitcoin as an alternative investment within a global stock and bond portfolio.

This shift is driven by the evolving financial landscape, characterized by diminished returns and diversification benefits from traditional assets, alongside the rising threat of inflation. The incorporation of Bitcoin into the 60/40 portfolio model is not just a fleeting trend but a strategic response to these changing dynamics.

Sharpe Ratio Contribution of 2.5% Bitcoin Allocation to a Traditional 60-40 Portfolio (Yearly Rebalancing)

Institutional investors, as evidenced by the strategic allocations of entities like the Yale University Endowment, are increasingly recognizing the value of diversifying their portfolios with alternative investments, including cryptocurrencies like Bitcoin.

The empirical data from various studies, including those conducted by Fidelity Investments, Cointelegraph Research, and the CFA Institute, reveal a significant tilt toward Bitcoin, reflecting its potential to enhance returns while offering a hedge against inflation and currency devaluation.

This chapter has shown that adding Bitcoin to a traditional portfolio can significantly improve its performance metrics, including cumulative returns and Sharpe Ratio, without disproportionately increasing risk or maximum drawdowns.

The optimal allocation, time horizon, and rebalancing strategies for Bitcoin investment have been thoroughly examined, providing valuable insights for institutional investors and fund managers. However, it’s important to acknowledge the challenges associated with Bitcoin investments, such as volatility, the need for specialized infrastructure, regulatory uncertainties, and limited historical data.

This review underscores Bitcoin’s increasing importance in asset management, reflecting a broader acceptance amidst financial volatility and changing market dynamics. Despite the potential for enhanced portfolio performance and inflation hedging, challenges such as regulatory uncertainties and the asset’s inherent volatility are noteworthy. The article concludes that Bitcoin’s inclusion in diversified portfolios signifies a pivotal shift in investment strategies, advocating for innovation and flexibility in the face of evolving financial landscapes.

In the 2024 Outlook, André Dragosch, PhD., alongside the ETC Group, thoroughly examines the relationship between global economic trends and Bitcoin’s valuation. By analyzing key indicators such as the U.S. unemployment rate and housing market conditions, the report reveals how an impending economic downturn in the United States could paradoxically boost Bitcoin’s price. It also dives into investment strategies to mitigate Bitcoin’s volatility and discusses the evolving landscape of digital asset trading, highlighting IMC’s strategic moves in this space.

The ETC Group’s 2024 Outlook written by André Dragosch, PhD., is an exceptional report on the relationship between global macroeconomic conditions and Bitcoin’s price. Reviewing leading indicators such as the U.S. unemployment rate, the NAHB Housing Market Index, and the regional Fed manufacturing surveys, the report indicates that the U.S. economy might already be sliding into a recession. However, Dr. Dragosch explains that a recession may push Bitcoin’s price even higher, “any material economic weakness, especially in U.S. employment, is likely going to induce renewed monetary easing by the Fed.”

Using data from Bloomberg, the annual maximum drawdowns and returns were calculated between 2010 and 2023. The results show that the maximum drawdown can be pretty significant in Bitcoin’s bear market years. The worst 2022 drawdown saw Bitcoin lose 67% of its value. However, Bitcoin’s annual return was only negative 3 out of the last 13 years, 2022, 2018, and 2014, all coinciding with Bitcoin’s predictable 4-year halving cycle.

Investors can incorporate dynamic or static rebalancing strategies to help avoid the maximum drawdowns associated with Bitcoin’s performance, which ETC Group discusses in their recent report. One example is the rebalancing strategy utilized by the Bitcoin Alternative Investment Fund in Liechtenstein, the Digital and Physical Gold Fund by Incrementum. The strategy automatically rebalances between two uncorrelated assets, Bitcoin and gold, once either asset surpasses a target threshold. 

“This report shows that as a fund manager, it makes sense to attribute part of your investments to digital assets, and as a high-frequency trading firm, you should attribute part of your resources to crypto as well. At IMC, we invest capital, time, and people to become as dominant in this space as we are in traditional markets.

Trading in digital assets is evolving rapidly. In some ways, it’s moving towards traditional market trading. At IMC, we particularly love the crypto-specific characteristics, notably the Decentralized Finance space and trading in perpetual futures, a new addition to our portfolio.  

IMC is committed to trading crypto and we’re in it for the long run; given the size of our company, the long-term strategy forms the basis for everything we do. Particularly because it takes a lot of time to adapt our systems to new markets and products, as everything we do is automated.

Sharpe Ratio Contribution of 2.5% Bitcoin Allocation to a Traditional 60-40 Portfolio (No Rebalancing)

At IMC, we are excited about the crypto space and we’re looking forward to the next bull run. By making markets more professional and competitive, both on and off chain, and therefore a lot more attractive for everybody, we play our part in building the ecosystem and increasing the chances of that run.”

Michiel Knoers sits on the Board of IMC as the Global Head of Trading. He started at IMC in Chicago in 2012 and worked there for seven years before moving to Amsterdam to lead the European trading team. In early 2021, IMC started trading crypto after acquiring FRIJT Trading and, more recently, Tensor Technologies in Switzerland – both companies set up by former IMC employees.  

Sharpe Ratio Contribution of 2.5% Bitcoin Allocation to a Traditional 60-40 Portfolio (Monthly Rebalancing)

Throughout the sample portfolios in the backtest, the impact of a 2.5% allocation to Bitcoin to the Sharpe Ratio varied in magnitude, but the average influence was significant at 21.25 percentage points. Crucially, the beneficial effect of including Bitcoin in the investment portfolio did not result in increased volatility. This is evidenced by Figure 22 – 25, which illustrates the enhancement of the Sharpe ratio of a conventional investment portfolio during the same rolling three-year periods.

Similar to the case with cumulative returns, incorporating Bitcoin consistently improved the overall Sharpe ratio of the traditional portfolio for every three-year interval examined in our research. Our study’s results confirm those found by BitWise in their 2023 and 2022 reports on adding Bitcoin to a traditional portfolio.  

The ETC Group’s 2024 Outlook, authored by Dr. André Dragosch, provides valuable insights into the dynamics between macroeconomic trends and Bitcoin’s market performance. Offering a forward-looking perspective, the report not only anticipates Bitcoin’s price resilience in the face of economic challenges but also outlines strategic approaches for navigating the crypto market’s volatility. Furthermore, it presents the case for incorporating Bitcoin into diversified portfolios, demonstrating its positive impact on risk-adjusted returns without adding volatility. This comprehensive analysis underpins the growing synergy between traditional finance and cryptocurrency, emphasizing innovation and strategic investment as key drivers for success in the evolving digital asset landscape.

In the evolving landscape of investment strategies, the integration of digital assets like Bitcoin into traditional portfolios has sparked considerable interest and debate among investors. This analysis ventures into the realm of portfolio management with a specific lens on the impact of including Bitcoin, with a modest allocation of 2.5%, on the overall performance and volatility of a traditional investment portfolio over nearly a decade, from January 1, 2014, to November 23, 2023.

By employing a meticulous approach that examines the three-year rolling cumulative returns day by day, this study illuminates the outcomes of various rebalancing strategies – or the lack thereof – in enhancing portfolio returns while managing risk. Through the clear graphical representation and comprehensive summary statistics, our investigation seeks to offer valuable insights into the optimal integration of Bitcoin in diversifying investment strategies, navigating the trade-offs between return maximization and volatility control.

In the following analysis, we assume a 2.5% allocation to Bitcoin and look at the three-year rolling cumulative return for the period between Jan. 1, 2014, and Nov. 23, 2023. This means that we calculate the cumulative return for three years and then move forward day by day. As depicted in Figure 20, no rebalancing provided the best results historically when measured by cumulative return.

No rebalancing provided a 178% return compared to a portfolio with no Bitcoin, which provided a 75% return. However, rebalancing strategies can reduce risk, especially when combined with uncorrelated assets. Historically, the best rebalancing frequency for Bitcoin was yearly (143%), followed by quarterly (111%), followed by monthly monthly (97%). Essentially, this points out that letting the Bitcoin position breathe as much as possible within the portfolio has historically provided the best results.

Figure 1: Comparing Rebalancing Strategies for Bitcoin in a Traditional Portfolio

Source: Cointelegraph Research, Crypto Research Report

The summary statistics chart shows that the lowest volatility rebalancing strategy for Bitcoin was monthly with a 10.88 annualized standard deviation. Interestingly, the traditional portfolio without Bitcoin had more volatility than a portfolio with 2.5% allocated to Bitcoin and rebalanced monthly, quarterly, or yearly. The lowest maximum drawdown rebalancing strategy was monthly as well. Therefore, a conservative approach to Bitcoin would include a single-digit allocation to Bitcoin with a monthly rebalancing strategy.

Alternatively, investors could avoid transaction fees associated with selling Bitcoin on a time-based trigger such as a month or quarter and instead set a target range for the Bitcoin allocation to move between. Once the Bitcoin allocation surpasses a certain threshold, for example, 5%, the excess Bitcoin could be sold on the spot or with covered call options. Dynamic rebalancing strategies for Bitcoin have outperformed time-dependent strategies historically. 

Figure 2: Summary Statistics of Bitcoin Rebalancing Strategies

The exploration into the strategic allocation of Bitcoin within traditional portfolios reveals a nuanced landscape where the balance between risk and return is delicate. The empirical evidence suggests that a laissez-faire approach to portfolio rebalancing, particularly concerning Bitcoin, has historically yielded superior returns compared to more active rebalancing strategies. However, the allure of higher returns does not come without its counterpart of increased risk, prompting a deeper consideration of rebalancing frequencies and strategies to mitigate volatility.

Notably, the analysis underscores the efficacy of dynamic rebalancing strategies over their time-dependent counterparts, offering a compelling case for a more nuanced, threshold-based approach to managing Bitcoin allocations. In this intricate dance of numbers and market movements, investors are guided towards informed decisions that align with their risk tolerance and investment goals, marking a significant step forward in the sophisticated integration of cryptocurrencies into diversified portfolios.