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April 11, 2024 at 11:22 AM
What You Need to Know
- WisdomTree findings on bitcoin's portfolio effect aligns with what's found in other papers, Ric Edelman says.
- Fidelity Canada has added its bitcoin ETF even to a conservative portfolio.
Amid the rancor over bitcoin and the role, if any, it should play for mainstream investors, research suggests a bit of the cryptocurrency can boost the traditional 60% stock, 40% bond portfolio, with extra but somewhat muted volatility.
Some prominent asset managers, in fact, have pointed to research as evidence that a small bitcoin allocation can play a helpful role even in a conservative ETF.
It takes little more than a glance on X, formerly Twitter, or elsewhere on social media to find the partisans on both sides of the bitcoin divide: those who consider it nothing more than gambling and those who think the critics just don’t get it.
Indeed, when three U.S. senators two years ago challenged Fidelity Investments’ “immensely troubling” plan to let customs add bitcoin to their 401(k) accounts, they faced a wave of social media scorn from crypto advocates who said the lawmakers “had not done the work” and “don’t get it.”
Vanguard Group saw an angry backlash after making clear earlier this year it wouldn’t offer customers access to the newly approved spot bitcoin ETFs or any other crypto-related products on its platform, saying these digital currencies don’t align with the company’s focus on equities, bonds and cash.
While bitcoin advocates and critics alike make strong arguments, research suggests the cryptocurrency in relatively small amounts could play a valuable role in an otherwise standard balanced portfolio.
Among the latest developments is a January paper from asset manager WisdomTree, which examined bitcoin performance in a hypothetical equities and fixed-income portfolio. The paper (registration required) does caution that bitcoin is highly speculative, involves a high degree of risk, including the potential for quick, large losses, and may not be suitable for all investors.
The researchers simulated four example portfolios over a decade, starting on Dec. 31, 2013, in which 1% to 10% of assets were switched from equities to bitcoin, representing a range from very small to a larger exposure to bitcoin.
Looking at the hypothetical performance over 10 years, “small allocations to bitcoin using systematic re-balancing has enhanced annualized portfolio returns,” WisdomTree found. The enhanced return hewed closely to the level of bitcoin exposure in what started as a 60/40 portfolio reflecting the Russell 3000 stock and Russell U.S. Aggregate bond indexes.
While the base portfolio generated a 7.7% annualized return, switching 1% from equities to bitcoin would have produced an 8.7% annualized return; a 3% bitcoin allocation meant an 8.7% return, a 5% allocation translated to a 12.5% return and a 10% allocation would have offered a 16.8% return, according to WisdomTree’s data..
Not surprisingly, bitcoin also boosted portfolio volatility, although that effect appeared somewhat restrained given bitcoin’s wide swings.
