BlackRock’s guidance to allocate 1 to 2 percent to bitcoin is drawing attention as a signal of expanding institutional investment. Some in the market also say the benchmark could instead work as a structure that creates selling pressure in bull markets.

On July 6, blockchain media outlet CryptoSlate reported that if advisers add bitcoin to model portfolios, future trading is likely to be driven more by rebalancing rules, taxes and whether collateralised loans are used than by price forecasts.

BlackRock Investment Institute has suggested that a 1 to 2 percent allocation in a multi-asset portfolio is reasonable given bitcoin’s high volatility. The benchmark is based on the asset’s contribution to overall portfolio risk rather than on expected returns. Using a typical 60-40 portfolio as a reference, analysis found that if bitcoin’s weight is 1 percent, total risk is about 2 percent; at 2 percent, about 5 percent; and if it rises to 4 percent, about 14 percent.

The issue arises when bitcoin rises faster than stocks and bonds. Assuming other asset prices are unchanged, an initial 2 percent weight would expand to 3 percent after a gain of about 51.5 percent, and to 4 percent after a gain of about 104 percent. In that case, advisers would have to sell some bitcoin to maintain the 2 percent target. Such rebalancing could also affect supply and demand as the market grows. BlackRock’s spot bitcoin ETF, IBIT, had cumulative net inflows nearing $60 billion as of July 2.

Some in the market say the way advisers and platforms manage portfolios has now reached a level where it can affect supply and demand across the entire bitcoin market.

Recent fund flows have slowed somewhat. Citigroup on July 1 cut its 12-month bitcoin price target to $82,000 from $112,000. It also lowered its forecast for ETF inflows to $0 from $10 billion. U.S. spot bitcoin ETFs also recorded net outflows of more than $2.7 billion over 10 trading days from late June to July 1.

Some also dispute the view that a bull market will immediately lead to large-scale selling. Kelly Ye (켈리 예), co-founder and chief investment officer at CoinBridge, explained that about 80 percent of current bitcoin ETF trading is led by individual investors, while trading through advisers is about 20 percent. He added that major brokerages require at least 6 months to 1 year of performance and due diligence before adding new ETFs to model portfolios.

He also said advisers could apply wider rebalancing bands for highly volatile assets or adjust weights using new client inflows.

Taxes are also a variable. The analysis says that in tax-advantaged accounts such as IRAs and Roth IRAs, trades within the account do not trigger immediate taxes, so the burden of selling due to rebalancing may be relatively lower.

The expansion of the options market is also cited as a factor that could reduce forced selling. IBIT options trading is growing quickly, and the Options Clearing Corporation said June ETF options trading volume rose about 70 percent from a year earlier. Goldman Sachs is also pushing to launch bitcoin ETF products combined with options strategies.

Raising funds using bitcoin as collateral is also being discussed as an alternative. Mauricio Di Bartolomeo (마우리시오 디 바르톨로메오), co-founder of bitcoin lender Ledn, explained that demand is rising among both companies and individuals to use bitcoin as collateral rather than sell it. He said that with appropriate risk management, investors who borrowed against bitcoin in the past may have maintained higher asset values than those who sold all their holdings. He also pointed out that collateralised loans require sufficient additional collateral, meaning the strategy is not suitable for all investors.

The industry sees portfolio management of bitcoin as a key factor that will determine market volatility as institutional money expands. Bitwise said assets tracking third-party model portfolios rose about 62 percent to more than $645 billion this year from $400 billion in 2023.

Some in the market say rebalancing rules could create new supply in each bull market, but tax-efficient accounts, options strategies and new inflows could absorb a significant part of it.