Millson’s example is illustrative: He found that a 1%-2% Bitcoin allocation to a 60/40 portfolio reduced total risk by 9% to 24%, while volatility was not affected.
However, Bitcoin exposures were more significant than expected. A small allocation of 5% contributed more risk than 60% to the portfolio and increased volatility by around 70%. Higher volatility and risk are associated with higher allocations.
1. Nerves of steel
Will advisors and investors hold on to crypto even when returns are low? According to Millson, Bitcoin dropped 50% between mid-April and June 25, 2021. This is not a new phenomenon for cryptocurrency.
He adds that those who were able to hold on during difficult times might have’reaped some benefits’. Is it worth the risk? According to him, a balanced portfolio that had a 5% Bitcoin allocation over the past decade saw a just under 15% return when it was sourced from bonds or equities. This was compared to a portfolio of 6.3% and 60/40. During the 11-year period, however CMBI Bitcoin index experienced peak-to-valley drops ranging between -41% and -93%.
Millson says that the non-Bitcoin 60/40 portfolio averaged 6.8% during these Bitcoin stress times. The standard 60/40 portfolio saw an increase of 1.9%, while the Bitcoin-infused portfolio lost three percentage points. He states that it can be hard to stay with portfolios that are failing when stocks and bonds do well.
2. Is Correlation Rising?
The lack of correlation between Bitcoin and stocks is a positive aspect of adding it to your portfolio. Millson discovered that Bitcoin’s rolling correlation with the wider equity markets is between 0.25 to 0.35. He says, “Yes, it’s still low, and it might fall back to near zero again but it’s still noteworthy.”
However, if correlation is not stable, the importance of where allocations are sourced will increase.
He concluded that advisors and investors who are considering adding Bitcoin to their portfolios should be aware of the product’s volatility. He noted that while past performance may seem strong, it does not necessarily predict future results.