Bitcoin allocations trend positive for 60/40 portfolios: Bitwise
BTC allocation would have contributed positively to a diversified portfolio’s returns in 100% of three-year periods since 2014, study finds
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Adding a portion of bitcoin to a traditional portfolio allocating 60% to stocks and 40% to bonds would have helped investors over a range of rolling return periods, according to an analysis by Bitwise.
The Tuesday study — authored by Bitwise chief investment officer Matt Hougan and research analyst Gayatri Choudhury — found that a 2.5% allocation to bitcoin, for example, would have boosted the three-year risk-adjusted return of a 60/40 portfolio by 12 percentage points.
The study also found that a quarterly rebalancing strategy delivered “a healthy balance” between capturing bitcoin’s asymmetric upside returns while controlling drawdowns.
The analysis started with a 60% allocation to the Vanguard Total World Stock ETF (VT) and a 40% position in the Vanguard Total Bond Market ETF (BND). Bitwise then tested bitcoin allocations from 0% to 10%.
Bitwise reviewed price data from Jan. 1, 2014 to June 30, 2023. The firm chose to remove the first years of bitcoin’s existence, given the asset’s return of 1,537,795% from mid-July 2010 to the end of 2013.
Assuming quarterly rebalancing, the 60/40 portfolio without bitcoin returned 64.3% over the nine-plus year span — an annualized return of about 5.4% per year. Adding a 2.5% bitcoin allocation would have upped the portfolio’s cumulative return to roughly 101.6%.
If bitcoin (BTC) holdings represented 5% of the portfolio, the returns rose to 144.7%.
But given bitcoin’s price ascent from $755 at the start of 2014 to more than $30,000 in the halfway point of 2023, the study delved into how allocating to bitcoin would have affected a portfolio during “more variable market conditions.”
“It is possible to have a fuller understanding of the impact of adding bitcoin to the traditional portfolio by looking at rolling return periods rather than picking arbitrary start and end dates,” Hougan and Choudhury wrote.
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 data about better returns for longer holding periods comes as long-term holders of bitcoin have continued to accumulate, according to a separate report by crypto exchange Bitfinex published Monday. The percentage of bitcoin’s supply that hasn’t moved in more than three years reached 40%, the crypto exchange found — a three-year high.
“Importantly, the positive contribution from a bitcoin allocation does not come at the price of greater volatility,” the Bitwise study notes. “As with cumulative returns, a bitcoin allocation had a positive impact on the traditional portfolio’s overall Sharpe ratio for every possible three-year period in our study.”
The Sharpe ratio measures the return of an investment compared to its risk to assess risk-adjusted performance.
“We also found that the impact on maximum drawdowns began to increase rapidly at allocations of 5% or more,” Bitwise notes in the report. “This may make it uncomfortable for investors to allocate above this level.
Bitcoin’s price was around $27,400 as of 9 am ET on Wednesday, but sharply Tuesday on the heels of a favorable court ruling for Grayscale Investments in its case against the SEC.
Though the asset is up about 66% year to date, it has fallen about 60% from the all-time high of about $69,000 reached in November 2021.
Update: The headline of this report has been updated for clarity and correctness.
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