It's no secret that Bitcoin (BTC 3.71%) is one of the most volatile assets. For this reason and possibly others, most investors shy away from giving the world's most valuable cryptocurrency a spot in their portfolios.
However, as time marches on and Bitcoin continues to prove its worth in an increasingly digital world, there's mounting evidence that owning even just a little Bitcoin might be one of the best ways for investors to boost their portfolios over the long term.
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What the numbers say
In an August study, crypto asset manager Bitwise Investments analyzed how varying degrees of Bitcoin allocation would affect a traditional 60/40 portfolio -- and the results were astounding. The composition of the research was fairly straightforward. In the hypothetical portfolio, 60% was invested in equities in the form of the Vanguard Total World Stock ETF (VT 1.96%) and the remaining 40% was designated for bonds using the Vanguard Total Bond Market ETF (BND 0.58%).
Bitwise also chose to focus on Bitcoin's performance from January 2013 to June 2023 since Bitcoin's price ascension from 2010 to 2013 was more than 1,500,000%. This is unlikely to happen again and would likely skew results. Lastly, to capture how varying degrees of allocation affected portfolio performance, Bitwise analyzed Bitcoin based on it making up 1%, 2.5%, and 5% of a portfolio.
CRYPTO: BTC
Key Data Points
The results speak for themselves. Over the 10-year time frame that the study analyzed, the traditional 60/40 portfolio without any Bitcoin allocation returned a healthy 64%. But when adding just 1% of Bitcoin, performance jumped to 78%. At 2.5% of Bitcoin, the portfolio more than doubled to 101%, and bumping exposure to 5% resulted in an astounding 144% increase.
Striking a balance
These results alone are intriguing and highlight the value Bitcoin presents for investors looking to adequately diversify while also increasing performance. But Bitwise took the analysis a step further. Adding to its evaluation of performance based on varying allocations, Bitwise also considered the impact rebalancing the portfolio over particular time frames would have.
After applying rebalancing strategies on an annual, quarterly, and monthly basis to each of the designated allocations, Bitwise found that the quarterly rebalancing produced the best returns while minimizing volatility.
To combine the results of allocation levels and rebalancing strategies, Bitwise discovered that the ideal amount of Bitcoin exposure would be at 5%, with a quarterly rebalancing. This strategy struck the perfect balance of maximizing performance while limiting volatility as overall risk significantly increased over the 5% level.
The Bitcoin effect
In an effort to capture the overall potential Bitcoin exposure provides to portfolios, regardless of the level of allocation, Bitwise compiled additional data from its analyses to highlight the misconceptions around Bitcoin's volatility and performance.
Across all scenarios of allocation and rebalancing, results proved that "positive contribution from a bitcoin allocation does not come at the price of greater volatility." In fact, the study found that Bitcoin provided a boost to all portfolios' Sharpe ratios, which measures risk-adjusted return and performance.
Perhaps the most important discovery from the analyses was Bitcoin's usefulness over longer time spans. Bitcoin would have contributed positively to a diversified portfolio's returns in 70% of one-year periods, 94% of two-year periods, and 100% of three-year periods since 2014, assuming quarterly rebalancing.
The multiple benefits Bitcoin produced, even at a 1% allocation, highlights its ability to favorably impact portfolios over the long term. Admittedly, higher levels of allocation for those with shorter time horizons and lower risk tolerances might not be recommended. For investors with a goal of holding for three years or longer, however, few other assets can provide positive benefits without introducing additional risk.
