Bitwise: What proportion of Bitcoin in asset allocation can maximize returns?

Author: Ben Strack, Blockworks; Compiler: Songxue, Golden Finance

**According to Bitwise analysis, adding a portion of Bitcoin to a traditional portfolio, allocating 60% to stocks and 40% to bonds, would help investors generate returns over a series of rolling return periods. **

Tuesday's research, authored by Bitwise chief investment officer Matt Hougan and research analyst Gayatri Choudhury,** found that a 2.5% allocation to Bitcoin, for example, would boost the three-year risk-adjusted return of a 60/40 portfolio by 12%. **

The study also found that the first-quarter rebalancing strategy strikes a “healthy balance” between capturing Bitcoin’s asymmetric upside returns and controlling drawdowns. **

The analysis begins by allocating 60% to the Vanguard Total World Stock ETF (VT) and 40% to the Vanguard Total Bond Market ETF (BND). Bitwise then tested the Bitcoin allocation between 0% and 10%.

Bitwise reviewed price data from January 1, 2014 to June 30, 2023. Given the asset's return of 1,537,795% from mid-July 2010 to the end of 2013, the firm chose to remove data from the first few years of Bitcoin's existence.

Assuming quarterly rebalancing, a 60/40 portfolio excluding bitcoin would have returned 64.3% over nine years, an annualized return of about 5.4%. **Adding 2.5% to the Bitcoin allocation would increase the portfolio's cumulative return to approximately 101.6%. **

**If Bitcoin (BTC) holdings accounted for 5% of the portfolio, the return rose to 144.7%. **

But given that Bitcoin’s price has risen from $755 in early 2014 to over $30,000 by mid-2023, the study delves into how allocating to Bitcoin in “more volatile market conditions” would impact a portfolio.

“By looking at rolling return periods, rather than choosing arbitrary start and end dates, a more complete picture of the impact of adding Bitcoin to a traditional portfolio can be obtained,” Hogan and Chowdhury wrote.

Since 2014, assuming quarterly rebalancing, Bitcoin has positively contributed to diversified portfolio returns 70% of the time in one year, 94% in two years, and 100% in three years.

As accumulation continues for long-term Bitcoin holdings, data is emerging regarding better returns for holding Bitcoin over the long term, according to a separate report released by cryptocurrency exchange Bitfinex on Monday. The cryptocurrency exchange found that the proportion of Bitcoin supply that had not changed in more than three years reached 40%, a three-year high.

“Importantly, the positive contribution of Bitcoin allocations does not come at the expense of greater volatility,” Bitwise research noted. “As with cumulative returns, in our study, Bitcoin allocations contributed significantly to every three possible There is a positive impact on the overall Sharpe ratio of the tenor traditional portfolio.”

**The Sharpe Ratio measures an investment's return compared to its risk to assess risk-adjusted performance. **

“We also found that the impact on maximum drawdowns starts to increase rapidly when allocations reach 5% or more,” Bitwise noted in the report. “This may make investors uncomfortable when allocating above this level.

Bitcoin was trading around $27,400 as of 9 a.m. ET on Wednesday, but on Tuesday, following a favorable court ruling in Grayscale Investments' case against the U.S. Securities and Exchange Commission (SEC), The price of Bitcoin has risen sharply.

While the asset is up about 66% year to date, it is down about 60% from its all-time high of about $69,000 in November 2021