Bitcoin allocation should start with drawdown tolerance, not return targets

The key question in Bitcoin investing is not the target return, but the drawdown a portfolio can withstand, according to Mike Treidl, chief investment officer of Bluecoin Capital. Institutional adoption, he said, is likely to unfold over decades rather than as a short-term event.

In an interview with Bitcoin Magazine on Oct. 13, Treidl said both institutions and retail investors should begin with the “risk budget first” when considering a Bitcoin allocation.

Treidl said Bitcoin can repeatedly fall 50% to 60% from peak levels over a cycle. If a portfolio holds a 2% Bitcoin allocation and the price falls by half, the total portfolio impact is 1%, which he said is survivable. A 10% allocation, by contrast, could push investors to capitulate near the lows. In that case, he said, the issue may be position size rather than the asset itself.

He said the recent rebound from the lows came faster than expected. Many fund managers and allocators had expected Bitcoin to recover gradually, but Treidl said Bitcoin “sometimes takes the elevator up,” requiring investors to be positioned in advance.

Treidl attributed the rebound largely to seller exhaustion. After a year in which sellers outpaced buyers, most investors who wanted to sell had already had the chance to do so, while lower prices became attractive to buyers. Bitcoin treasury companies such as Strategy and Metaplanet have become marginal buyers, he said, supporting a cycle in which rising prices enable more Bitcoin purchases.

He also pointed to perpetual preferred equity as a tool that can expand Strategy’s Bitcoin-buying capacity. Debt can create default risk if an issuer misses a payment, while preferreds allow coupon payments to be deferred without the same consequences, giving issuers more room to withstand difficult market conditions.

Treidl said Michael Saylor’s use of capital markets could provide another source of demand. If Strategy’s preferreds trade near or above $100 for a period of time, the company could issue more preferred equity and buy additional Bitcoin, adding another engine alongside its existing share issuance model.

For investors who already own Bitcoin, Treidl said Strategy can offer value beyond simple price exposure. He said it provides leverage-like exposure in a bull market without the margin-call risk of traditional borrowing, while also seeking to increase Bitcoin holdings per share over time.

The next wave of institutional adoption could come from large pension funds and endowments, Treidl said. He noted that some major institutions have already adopted Bitcoin, and said larger institutions and sovereign states may experiment with it as market cycles continue and Bitcoin’s operating history lengthens.

Treidl said Bluecoin Capital’s August performance was helped significantly by its overweight Bitcoin position. The fund was bullish on Bitcoin going into August, and exposure to Strategy-related products below par created a favorable entry point, he said.

Looking ahead over the next 12 to 24 months, Treidl said the biggest opportunity is the growth phase at the start of a bull market. The main risk, he said, remains sizing: investors need allocations that can support return and diversification goals while still surviving 50% to 60% drawdowns that can occur every few years.