Wider institutional adoption could dampen some of bitcoin’s volatility, according to a BlackRock Investment Institute paper. While that could allow investors to size up their allocation, it could also mute bitcoin’s eye-popping returns.
“Looking ahead, should bitcoin indeed achieve broad adoption, it could potentially also become less risky — but at that point it might no longer have a structural catalyst for further sizable price increases,” they wrote.
The world’s biggest asset manager says that bitcoin does have a place in multiasset portfolios — up to a certain point.
Giving bitcoin a 1% to 2% weighting would produce a similar risk profile to the so-called Magnificent 7 technology stocks in a standard 60/40 portfolio of stocks and bonds, according to the BlackRock Investment Institute paper released Dec. 12. That’s a “reasonable range” to devote to bitcoin, as anything beyond 2% would sharply increase crypto’s share of overall portfolio risk, the paper said.
It’s a potential blueprint for investors wondering how to think about allocating to bitcoin as the cryptocurrency soars to record highs above $100,000. President-elect Donald Trump’s embrace of the sector combined with his pro-crypto picks for top government jobs have powered the rally, fueling billions of dollars into bitcoin exchange-traded funds — including BlackRock’s IBIT. However, those dazzling returns come alongside bitcoin’s infamous volatility, which is why taking a “risk budgeting” approach to portfolio construction makes sense, according to the paper.
“Even though bitcoin’s correlation to other assets is relatively low, it’s more volatile, making its effect on total risk contribution similar overall,” authors including Samara Cohen, BlackRock’s CIO of ETF and index investments, wrote in the paper. “A bitcoin allocation would have the advantage of providing a diverse source of risk, while an overweight to the Magnificent 7 would add to existing risk and to portfolio concentration.”
While bitcoin has surged by 140% this year, the path to all-time highs has been exceptionally rocky. The world’s largest cryptocurrency has seen drawdowns of 70% to 80% since its creation in 2009, the paper noted.
Contributing to the crypto’s rally this year was the January launch of U.S. spot bitcoin ETFs. Assets in the dozen funds have climbed above $113 billion since their debut, with investors pouring in almost $10 billion since Trump’s presidential victory in November, data compiled by Bloomberg shows.
