Author: Ben Strack, Blockworks; Compiler: Songxue, Jinse Finance
According to Bitwise ’s 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 quarterly rebalancing strategies achieve a “healthy balance” between capturing Bitcoin’s asymmetric upside returns while controlling drawdowns.
The analysis begins with an allocation of 60% to Vanguard Total World Stock ETF (VT) and 40% to Vanguard Total Bond Market ETF (BND). Bitwise then tested Bitcoin allocations ranging from 0% to 10%.
Bitwise reviewed price data from January 1, 2014 to June 30, 2023. The company chose to remove data from the first few years of Bitcoin's existence, given that the asset returned 1,537,795% from mid-July 2010 to the end of 2013.
Assuming quarterly rebalancing, the 60/40 portfolio excluding Bitcoin returned 64.3% over nine years, an annualized return of approximately 5.4%. Adding a 2.5% allocation to Bitcoin 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 on 70% of the one-year periods, 94% of the two-year periods, and 100% of the three-year periods.
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 published 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 allocation does not come at the expense of greater volatility,” Bitwise research noted. “As with cumulative returns, Bitcoin allocation contributed significantly to every possible three-year period in our study. There is a positive impact on the overall Sharpe ratio of traditional portfolios.”
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 begins to increase rapidly when allocations reach 5% or above,” Bitwise noted in the report. “This may make investors uncomfortable with allocations 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), Bitcoin price surges.
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
