As another crypto bull run unfolds, the question on many investors’ minds is: “Should I have invested in Bitcoin?”
Nearly 15 years after its introduction, this is no longer a fringe question. Today, even institutional investors overseeing billions find themselves defending why they aren’t invested in crypto rather than justifying why they are (as has been the case until fairly recently).
But the binary decision—to invest or not to invest—isn’t the real debate. Savvy investors are now asking more sophisticated questions and quantifying the potential impact of a BTC allocation on their portfolio.
Portfolio construction is a game of balance. For years, the classic 60/40 portfolio—60% equities, 40% bonds—has been the default setting for long-term investors. This dynamic, however, has been challenged in recent years, with investors venturing into newer, disruptive asset classes – enter cryptocurrency. The most popular choice for retail and institutional investors alike has been Bitcoin, this highly volatile, but increasingly mainstream digital asset.
In this post, we’ll explore how a modest allocation to Bitcoin—just 2%—would have affected a traditional 60/40 portfolio over the past year. We will analyze the impact, and the trade-offs that come with this choice. While this analysis isn’t investment advice, it’s a starting point for understanding how volatile assets like Bitcoin can influence broader portfolio dynamics.
Let’s set the stage. Portfolio 1 is your traditional 60/40 split: 60% equities via SPY (S&P 500 ETF) and 40% bonds via AGG (Aggregate Bond ETF). Portfolio 2 shakes things up by shaving 2% off equities and reallocating it to Bitcoin. The allocations look like this:
- Portfolio 1: 60% SPY, 40% AGG
- Portfolio 2: 58% SPY, 40% AGG, 2% BTC
The 2% Bitcoin allocation is intentionally conservative, reflecting the cautious sentiment of investors wary of introducing too much volatility. Let’s see how the numbers stack up.
From January 2024 to November 2024, Portfolio 2 (with Bitcoin) delivered a cumulative return of 18.0%, compared to Portfolio 1’s 16.45%.
On paper, that 1.15% edge looks great. But higher returns often come with strings attached, so let’s dig deeper.
Adding Bitcoin increased the portfolio’s annualized volatility from 6.74% in Portfolio 1 to 6.88% in Portfolio 2. The higher volatility stems directly from Bitcoin’s inherent price swings but was muted by its small allocation, demonstrating that even a highly volatile asset like Bitcoin can be introduced without significantly disrupting the portfolio’s overall risk profile. The impact here was marginal, thanks to a cautious allocation size.
Drawdowns are a critical stress test for any investment strategy.
Portfolio 2 experienced a maximum drawdown of -4.63%, just14 basis points worse than Portfolio 1’s -4.49%. Adding Bitcoin didn’t fundamentally change the portfolio’s ability to weather market downturns. Despite Bitcoin’s volatility, the drawdowns for both portfolios remained closely aligned.
To understand the real impact of Bitcoin, let’s break down the contributions:
- Equities (SPY): As expected, equities were the dominant driver of returns, capturing gains from the broader market’s upward momentum.
- Bonds (AGG): Bonds served their purpose as a stabilizer, softening the blow during equity drawdowns, even though they often had a negative contribution.
- Bitcoin (BTC): The contribution of BTC stays between 0% and 2.5% over the year, meaning it didn’t negatively impact the portfolio at any point in time. Notably it did not exhibit a negative contribution in the period of July-August drawdown, and ended the year just shy of 2.5% contribution to the overall portfolio performance.
What does this analysis tell us? Adding crypto exposure is like any other investment decision—it needs to be analyzed through the dual lens of risk and return. These two broad categories are examined through various analytics to determine the impact of a certain allocation.
While real world portfolios are rarely this simple, this post can be viewed as a thought experiment that underscores the importance of exploring new ideas in portfolio construction. A 2% Bitcoin allocation may not revolutionize your portfolio, but it introduces a dynamic layer that can boost returns without significantly increasing risk
At the end of the day, investing is about balance - the key is understanding how each piece fits into the larger puzzle.
