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How many bitcoins are appropriate in the investment portfolio?



Bitcoin has been a volatile asset since its inception in 2009, making some investors wary of investing. We believe that with relatively limited risk, Bitcoin can be allocated to have a meaningful impact on portfolio performance.

In this article, we highlight the potential diversification benefits that an allocation to Bitcoin can provide to a traditional 60/40 stock/bond portfolio. In particular, Bitcoin's lack of correlation with other assets potentially makes it a more useful alternative asset for investors looking to reduce business cycle risk, especially compared to other popular alternative investments such as gold or a basket of commodities .

So, how much should you invest in Bitcoin?

While there is no one-size-fits-all approach, we believe that Bitcoin is steadily developing as a store of value and backtesting Bitcoin price performance in a portfolio can still provide valuable insights for long-term investors. We also believe that it is essential to inform investors about the optimal allocation of Bitcoin in their portfolios, based on their risk appetite.

The investment portfolio of Buffett's companies suffered a large loss in the market plunge in the second quarter: According to news on August 6, Berkshire Hathaway, owned by Buffett, recorded a loss of US$43.8 billion in the second quarter, among which the investment portfolio plummeted in the market. $53 billion in losses. Auto insurer Geico posted an insured loss of $487 million as inflation and rising used car prices increased the cost of repairing and replacing damaged vehicles. Separately, Buffett reduced share buybacks in the second quarter as his conglomerate used its cash reserves to buy stakes in other companies. The company repurchased about $1 billion in stock in the second quarter, down from $3.2 billion in the first quarter; cash reserves were little changed at $105.4 billion in the second quarter, compared with $106 billion in the first quarter . (Golden Ten)[2022/8/6 12:06:30]

To help investors understand how Bitcoin can help or impact a portfolio, we created a database of daily returns starting in 2015; the first time investors were able to invest in Bitcoin via an exchange-traded product (ETP) currency. We start with a traditional balanced portfolio (60% stocks and 40% bonds) and then add notional Bitcoin (which subtracts the same weighting from stocks and bonds).

Report: Under the correct management strategy, Bitcoin can almost always increase the return on investment portfolio: On May 6th, a research report released by Bitwise showed that allocating a small portion of Bitcoin to a portfolio composed of stocks and bonds, even if Even in the past three years, the cumulative rate of return will also improve significantly. With the right management strategy, even buying at all-time highs, Bitcoin can almost always enhance the value of a mixed portfolio, substantially increasing the portfolio's cumulative and risk-adjusted returns. (CoinDesk)[2020/5/6]

Since Bitcoin is an early growth stage asset, most investors will allow some degree of skewing in their portfolio weights. We've decided to rebalance quarterly - despite its potential impediment to yield gains - because we believe rebalancing helps smooth out volatility.

Voice | Morgan Creek CEO: Bitcoin should be in everyone's portfolio: According to Cointelegraph, Morgan Creek CEO Mark Yusko believes that Bitcoin should appear in every investor's portfolio in an interview with CNBC. Yusko believes that BTC investment will far exceed the S&P 500 index investment fund in the next 10 years. [2019/5/24]

Adding Bitcoin to a portfolio does increase the volatility of the portfolio. So, how much should you add to your portfolio? There are several ways to solve this problem. One such approach is volatility positioning, and the chart below highlights the impact of different weightings of Bitcoin in a portfolio relative to risk.

JPMorgan Chase's "Decrypting Digital Currency" Report: Digital Currency Will Diversify in Global Bond and Stock Portfolios: According to foreign media news, JPMorgan Chase's global research department recently released a new digital currency research report titled "Decrypting Digital Currency: Technologies, Applications, and Challenges specifically mentions that digital currencies may one day help investors diversify their stock and bond portfolios. They pointed out that "if cryptocurrencies are still around in the next few years and are still part of the global investment market, then they may successfully pass through the current speculative stage and earn more normal returns. Volatility will become more Low, and the correlation with gold and the yen will become tighter." [2018/2/14]

Bitcoin's Impact on Volatility in a "40/60" Stock/Bond Portfolio Balance

For reference, the graph shows that a 4% weighting in the portfolio will increase the volatility of the overall portfolio by a little over 1%.

Another approach is to blend risk and return by analyzing the impact of different bitcoin portfolio weights on the portfolio Sharpe ratio (a measure of return relative to the level of risk taken).

The figure above is the backtest results of the past 5 years. A shift to the right indicates higher risk-adjusted returns, while an upward shift reflects a higher allocation to Bitcoin during the testing period. This analysis shows that the most significant Sharpe ratio improvement can be obtained by allocating up to 10% of the portfolio in Bitcoin. This highlights how even a small increase in Bitcoin can have a large impact on the Sharpe ratio. We also include other comparable assets and indices from the same period, even with extreme weights, which have less impact relative to Bitcoin on the Sharpe ratio.

Investors may view this 5-year time period as too favorable, and given that Bitcoin has risen during this time period, any analysis will look good. To account for this, we also included analysis from the Bitcoin price peak on December 18, 2017 to the present, a period during which Bitcoin had a negative impact on overall returns. The results show that the Sharpe ratio is still positive, although not to the same degree. This may seem like nonsense, but it is due to our quarterly rebalancing strategy, whereby Bitcoin is reset back to its original weight every quarter. We found that regular rebalancing may reduce the potential for higher returns, but is desirable in controlling Bitcoin's volatility.

Gold has a similar impact on portfolio diversification, although the portfolio weight needs to be over 20% to have any real impact on diversification. In contrast to Bitcoin, the minimum weight has a much greater impact.

All in all, the investment characteristics of Bitcoin have historically made it attractive as a driver of returns and diversification of investment portfolios. Compared to other common alternatives and diversification tools, Bitcoin has a huge positive impact on returns, Sharpe ratio and diversification, even at very low allocation sizes.

As for answering the question "how much should I invest in Bitcoin?", a lot depends on your appetite for risk. However, allowing for a modest 1.2% increase in overall portfolio volatility based on our analysis would suggest a Bitcoin portfolio weight of slightly less than 4% in a traditional 60/40 stock/bond portfolio, although investors should always Pay attention to regular adjustments to return to the original investment proportion.

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