BITWISE REPORT SAYS BITCOIN ENHANCES ALL EQUITY/BOND PORTFOLIOS
(Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)
“The findings are remarkable.”
This quote was the conclusion of ‘Bitcoins Role in a Traditional Portfolio’ research report published in August 2023.
This research published by Bitwise analyzed the impact Bitcoin has had on a traditional 60/40 equities/bond portfolio. We wanted to give a high level summary on this report, and we will link the full report at the end.
While 8DC continues to believe there is more value to capture besides Bitcoin in the crypto currency and crypto technology space, this report does a great job to capture why at least holding BTC is a must have for any portfolio.
The paper focuses on the period between January 1, 2014 and June 30, 2023. The decision to exclude the period before 2014 was made to better represent the experience of professional asset allocators in the U.S., as the first investable bitcoin fund launched in late 2013. In addition, removing the first years of bitcoin’s existence makes the analysis more conservative because bitcoin’s price appreciated substantially before 2014.
TL;DR IMPACT ON RETURNS
During the study period…
- A traditional 60/40 portfolio returned 64.34%, or 5.38% annualized (assuming quarterly rebalancing)
- Adding a 2.5% bitcoin allocation improved the return to 101.57%, or 8.49% annualized (assuming quarterly rebalancing)
- A 5% allocation to bitcoin would have boosted the return to 144.68%, or 12.09% annualized. More than doubling the total return of the traditional portfolio
This would have been achieved without major changes in either the portfolio’s volatility (10.88% with bitcoin, versus 10.59% without) or its maximum drawdown (24.26% with bitcoin, compared to 22.67% without). The portfolio’s Sharpe ratio, which measures excess returns per unit of risk (measured as standard deviation), would have improved by 68%.
KEY QUESTIONS ADDRESSED
The data in the research is able to address some very common questions for investors looking to add Bitcoin to their portfolio (where they traditionally have been in stocks and bonds).
1- If I was to add Bitcoin, what’s the time frame I should look at? What’s the minimum acceptable holding period?
The research shows that BTC had a positive impact on the portfolio in 70% of the 1 year periods, 94% of the 2 year periods, and 100% of the 3 year periods.
It also shows that BTC provides a strong contribution to returns across various holding periods. They tested data from every possible 1, 2, and 3 year period including bear markets of 2018, and 2022 (not cherry picking the bull runs).
Generally speaking, the longer the holding period, the better the results. But even in the 1 year studies, there were extreme outcomes. Best case scenarios contributed as much as 16.68%, and worst case scenarios detracted 2.98% from returns.
We think this shows how the fear of volatility in Bitcoin can be mitigated. Either by having a longer term outlook, implementing quarterly rebalancing, or better market timing.
The graphs below show the 1 year, 2 year, and 3 year impact Bitcoin would have had on returns…
The results of this analysis are remarkable, showing that Bitcoin would have contributed positively to the cumulative three-year return of a traditional portfolio for every possible start date since 2014.
2- Should I just buy and hold, or should I be rebalancing? How frequently?
The study states that without rebalancing, even a small allocation to BTC could grow to dominate a portfolio’s risk/return characteristics. Rebalancing can dampen volatility and return impact, but greatly minimize drawdowns.
Adding any rebalancing strategy, however — monthly, quarterly, or annual — significantly reduces the volatility and maximum drawdown compared to allocating to bitcoin without rebalancing.
There is a clear relationship between cumulative returns and volatility. The bitcoin allocation with no rebalancing led to a jump in portfolio volatility (from 11.37% to 20.71%) and a large uptick in maximum drawdown (from 23.90% to 51.35%).
We think this again shows how the fear of volatility in Bitcoin can be mitigated. Rebalancing Bitcoin quarterly or annually can have the greatest impact on returns, while maintaining stable volatility and minimizing drawdown downside.
3- How much Bitcoin should I add to a portfolio?
Based on the research, the report states that the conservative amount allocated to Bitcoin should be 5% of one’s total portfolio. However, for those seeking better returns, larger and larger allocations over a long enough time period (3 years+) unequivocally increased returns.
Our study showed that the impact on Sharpe ratios generally started to level off at the 5% allocation level. We also found that the impact on maximum drawdowns began to increase rapidly at allocations of 5% or more. Over three-year holding periods, adding larger and larger allocations to bitcoin would have monotonically increased a diversified portfolio’s cumulative returns.
For those that have already added Bitcoin to their portfolio, we think these data points can give a bit more confirmation on their choice, and lead them to consider the best way to look at Bitcoin as part of their portfolio.
3 TAKEAWAYS
There are 3 important takeaways from this report we want to highlight.
1- Have exposure to Bitcoin.
It is a must have asset in the portfolio, and this data backs it up.
2- Long-term expectation.
Data shows 100% positive impact on the portfolio when holding over 3 years. Don’t get swayed by media headlines, or daily volatility.
3- Rebalancing.
Taking an active approach to managing crypto is important. This minimizes drawdowns and volatility while maintaining positive returns to the portfolio.
Link to report: https://s3.amazonaws.com/static.bitwiseinvestments.com/Research/Bitcoins-Role-in-a-Traditional-Portfolio-08-2023.pdf
BITCOIN’S GROWTH- ADDITIONAL DATA
Many people, globally, are taking notice of this type of data (before this report) and are taking advantage of buying Bitcoin. Early adopters are growing, and we expect this asset to be a mainstream portfolio hold in the near future.
Currently more than 48.5 million Bitcoin holders globally.
Currently at an all-time high of addresses holding more than 10 Bitcoin (157k+)
Prediction models show Bitcoin adoption breaking past 10% in 2030, which can lead to parabolic growth similar to other disruptive technologies (Car, internet, smartphone, etc).
8DC’S ROLE
We believe now is the time to increase exposure to crypto assets and we can help.
We live and breathe crypto. It’s a full time job to keep up with all the new technology, price action, regulation, and more. We actively manage the portfolio. We track momentum indicators on different time frames, broader financial news, industry specific news, and chart trading ranges across many assets. All this to ensure our LPs aren’t being left behind.
