More Return With Less Risk?

A different approach to thinking about bitcoin’s role in a portfolio.

Bitcoin is a highly volatile asset. Using the most common measure of volatility, it’s about three or four times as volatile as the S&P 500 Index.

This doesn’t mean, however, that adding bitcoin to a portfolio makes the portfolio significantly more volatile. As bitcoin proponents like me love to point out: Because bitcoin has a low correlation to both stocks and bonds, adding it to portfolios has historically boosted 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 shift a small part into bitcoin. The table below compares risk and return metrics for portfolios with 0%, 1%, 2.5%, and 5% bitcoin allocations for the period from January 1, 2017, to December 31, 2024. I calculated it using the free portfolio simulation tool available in our Expert Portal. (Try it for yourself here.)

Portfolio Performance Metrics by Bitcoin Allocation

Source: Bitwise Asset Management with data from Bloomberg. Data from 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. Not considering taxes or transaction costs. Past performance does not predict or guarantee future results. Nothing contained herein is intended to predict the performance of any investment. Historical performance of sample portfolios has been generated and maximized with the benefit of hindsight. The returns do not represent the returns of an actual account and do not include the fees and expenses associated with buying, selling and holding funds or crypto assets. Performance information is provided for informational purposes only.

Notice, for instance, how a 5% allocation to bitcoin increased your total return from 107% to 207%—a 100 percentage point increase!—while your portfolio’s standard deviation (which measures its volatility) rose only modestly, moving from 11.3% to 12.5%. 

I find this type of study compelling. It aligns with how most investors think about allocating to bitcoin. But recently, I’ve been wondering if there is a better way.

Can You Get More Return and Less Risk?

One secret about people working in crypto is that often their personal portfolios do not look like the portfolios I’ve outlined above. In my experience, crypto enthusiasts tend to have barbelled portfolios—big allocations to crypto and big allocations to cash (or money market funds), with very little in between. (Mine is roughly equally weighted to crypto, stocks, and cash, which I’m not crazy enough to suggest for anyone else. But hey, full disclosure.)

Reflecting on this has me thinking: As you add bitcoin to a portfolio, does it make sense to compensate by managing risk elsewhere in your portfolio?

In the example highlighted above, we made room for a 5% bitcoin exposure by reducing the 60/40 stock/bond portfolio proportionally—taking 3% from stocks and 2% from bonds.

What if, instead, we both:

1. Invested 5% in bitcoin and increased our bond allocation by 5%, in theory reducing equity risk; and

2. Rotated exposure from broad-based bonds to short-term Treasury bills, in theory reducing bond risk?

Portfolio 3 shows the results:

Source: Bitwise Asset Management with data from Bloomberg. Data from January 1, 2017 to December 31 2024. “Stocks” are represented by the SPDR S&P 500 ETF Trust (SPY). “Broad-based bonds” are represented by the iShares Core US Aggregate Bond ETF (AGG). “Short-term Treasury bills” are represented by SPDR Bloomberg 1-3 Month T-Bill ETF (BIL). Bitcoin is represented by the bitcoin spot price.

Fascinating, right? Portfolio 3 generated higher returns than Portfolio 1—and roughly the same returns as Portfolio 2—with less risk than either. 

It makes you wonder: What if you push this further?

The table below adds a fourth portfolio, which cuts the equity exposure to 40%, boosts the bond portfolio to 50% and adds 10% bitcoin.

Source: Bitwise Asset Management with data from Bloomberg. Data from January 1, 2017 to December 31 2024. “Stocks” are represented by the SPDR S&P 500 ETF Trust (SPY). “Broad-based bonds” are represented by the iShares Core US Aggregate Bond ETF (AGG). “Short-term Treasury bills” are represented by SPDR Bloomberg 1-3 Month T-Bill ETF (BIL). Bitcoin is represented by the bitcoin spot price.

You get a lot more return, with less risk than Portfolio 2.

Of course, there’s no guarantee this will persist in the future—bitcoin’s early returns were extraordinary, and future returns may not match the returns during this study.

But the data reinforces something important: When you think about adding bitcoin to a portfolio, don’t do it in isolation. Think about it in the context of your entire risk budget. You might be surprised at the results.

Risks and Important Information

No Advice on Investment; Risk of Loss: Prior to making any investment decision, each investor must undertake its own independent examination and investigation, including the merits and risks involved in an investment, and must base its investment decision—including a determination whether the investment would be a suitable investment for the investor—on such examination and investigation.

Crypto assets are digital representations of value that function as a medium of exchange, a unit of account, or a store of value, but they do not have legal tender status. Crypto assets are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not currently backed nor supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies, stocks, or bonds.

Trading in crypto assets comes with significant risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks and risk of losing principal or all of your investment. In addition, crypto asset markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing.

Crypto asset trading requires knowledge of crypto asset markets. In attempting to profit through crypto asset trading, you must compete with traders worldwide. You should have appropriate knowledge and experience before engaging in substantial crypto asset trading. Crypto asset trading can lead to large and immediate financial losses. Under certain market conditions, you may find it difficult or impossible to liquidate a position quickly at a reasonable price.

The opinions expressed represent an assessment of the market environment at a specific time and are not intended to be a forecast of future events, or a guarantee of future results, and are subject to further discussion, completion and amendment. The information herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice, or investment recommendations. You should consult your accounting, legal, tax or other advisors about the matters discussed herein.