Stock market volatility, inflation, the merits of diversification and other factors continue to push investors to reevaluate the benefits of a traditional 60/40 portfolio.
New allocation models over the last decade have included alternatives like real estate, private credit and commodity strategies, and these trends have only accelerated as pension funds, endowments and other allocators search for the optimal allocation balance that enhances returns while managing risk.
Recently, cryptocurrency has entered the institutional conversation surrounding alternatives and, despite the industry's challenges last year, many allocators have renewed interest given this year's strong recovery in prices and growing confidence that the asset class is here to stay. Yet, questions remain about how to best allocate to bitcoin and this broader emerging industry in a diversified portfolio.
Investors are right to ask questions about the level of risk associated with these assets since bitcoin and other crypto assets have higher levels of voltaility even when compared to other risk assets like stocks, REITs and private equity. The rapid development of the crypto ecosystem and rise in prices has led to a lot of "just buy more bitcoin" portfolio advice and punditry without appreciation for volatility considerations, risk tolerance or regulatory and legal factors.
Previous studies on crypto allocations have mostly concluded that larger allocations to bitcoin result in higher returns and higher volatility, which can be appropriate for many portfolios, but this guidance isn't particularly helpful given that volatility tolerance is different for different investors.
Luckily, the industry has evolved significantly and there is now enough data to help answer this important question that remains top of mind for investors: Is there a quantifiable method for determining the right amount of crypto to allocate within any given portfolio?
This is something our team has worked on for some time. As bitcoin and the crypto ecosystem continues to develop, more data has become available to inform decisions about portfolio allocations. Recently, we developed a formula that is instructive, regardless of an investor's exposure to equities and other risk assets.