Author: Matt Hougan, Chief Investment Officer of Bitwise; Compiler: AIMan@黄金财经

Bitcoin is a highly volatile asset. In terms of the most common volatility measure, its volatility is about three to four times that of the S&P 500 index.

However, this does not mean that adding Bitcoin to a portfolio will significantly increase the volatility of the portfolio. As Bitcoin supporters like me like to point out: Because Bitcoin has a low correlation with both stocks and bonds, historically, adding it to a portfolio can improve returns without significantly increasing risk.

The typical way researchers demonstrate this is to take a traditional 60/40 portfolio (60% stocks, 40% bonds) and gradually transfer a small portion of the funds into Bitcoin. The following table compares the risk and return metrics of portfolios with 0%, 1%, 2.5%, and 5% Bitcoin allocations from January 1, 2017 to December 31, 2024. I used the calculations from the free portfolio simulation tool available in the Bitwise Expert Portal.

Portfolio Performance Metrics by Bitcoin Allocation

Source: Bitwise Asset Management, data from Bloomberg. Data range is January 1, 2017, to December 31, 2024. "Stocks" are represented by the SPDR S&P 500 ETF Trust (SPY). "Bonds" are represented by the iShares Core US Aggregate Bond ETF (AGG). Bitcoin is represented by the Bitcoin spot price. No taxes or transaction costs are considered. Past performance is not a prediction or guarantee of future results. Nothing contained herein is intended to predict the performance of any investment. The historical performance of the sample portfolio is generated and maximized with the benefit of hindsight. Returns do not represent returns on actual accounts and do not include fees and expenses associated with buying, selling, and holding funds or crypto assets. Performance information is for informational purposes only.

For example, note that allocating 5% of your funds to Bitcoin would have increased your total return from 107% to 207% (an increase of 100 percentage points)! And your portfolio’s standard deviation (a measure of its volatility) only rose slightly, from 11.3% to 12.5%.  

I find this type of research compelling. It’s consistent with how most investors think about allocating to Bitcoin. But lately I’ve been wondering if there’s a better way.

Can you get more return and reduce risk?

Here’s a secret about people in the crypto industry: their personal portfolios often look different than what I listed above. In my experience, crypto enthusiasts tend to have a balanced portfolio—a lot of crypto, a lot of cash (or money market funds), and very little in between. (My portfolio is roughly 50/50 crypto, 50/50 stocks, and 50/50 cash, and I’m not crazy enough to recommend that anyone do the same. But hey, let’s be public.)

Reflecting on this got me thinking: When you add Bitcoin to your portfolio, does it make sense to compensate by managing risk elsewhere in your portfolio?

In the example above, we made room for a 5% Bitcoin exposure by reducing our 60/40 stock/bond portfolio proportionally, taking 3% out of stocks and 2% out of bonds.

What if we could all:

invest 5% of our money in Bitcoin and increase our bond allocation by 5%, theoretically reducing our equity risk;

rotate exposure from broad bonds to short-term Treasuries, theoretically reducing our bond risk?

Portfolio 3 shows the results:

Source: Bitwise Asset Management, data from Bloomberg. Data range is from January 1, 2017 to December 31, 2024. "Stocks" are represented by SPDR S&P 500 ETF Trust (SPY). "Bonds" are represented by iShares Core US Aggregate Bond ETF (AGG). Bitcoin is represented by the spot price of Bitcoin. No taxes or transaction costs are considered. Past performance does not predict or guarantee future results. Nothing contained herein is intended to predict the performance of any investment. The historical performance of the sample portfolios was generated and maximized with the benefit of hindsight. Returns do not represent returns on actual accounts and do not include fees and expenses associated with buying, selling, and holding funds or crypto assets. Performance information is for informational purposes only.

Interesting, right? Portfolio 3 has a higher return than Portfolio 1, and about the same return as Portfolio 2, and has less risk than both.  

It makes you ask: what if you push it further?

The chart below adds a fourth portfolio, cutting the equity exposure to 40%, increasing the bond portfolio to 50%, and adding to 10% Bitcoin. Source: Bitwise Asset Management, data from Bloomberg. Data range is from January 1, 2017 to December 31, 2024. "Stocks" are represented by SPDR S&P 500 ETF Trust (SPY). "Broad bonds" are represented by iShares Core US Aggregate Bond ETF (AGG). "Treasuries" are represented by SPDR Bloomberg 1-3 Month Treasury Bond ETF (BIL). Bitcoin is represented by the Bitcoin spot price.

Compared to Portfolio 2, you can get more returns with less risk.

Of course, there is no guarantee that this will continue in the future - Bitcoin's early returns were outstanding, and future returns may not match the returns during this study period.

But the data highlights a point: when you consider adding Bitcoin to your portfolio, don't do it in isolation. Think about it in conjunction with your overall risk budget. You may be surprised by the results