If an institutional investor wants to incorporate bitcoin in a multi-asset portfolio, what is an appropriate allocation? A white paper from the BlackRock Investment Institute, “Sizing bitcoin in portfolios,” identifies a 1% to 2% allocation to bitcoin as reasonable. Any higher, and bitcoin would account for too much risk.
The paper stated that a 1% to 2% allocation to bitcoin lifts the digital currency’s share of portfolio risk to 2% to 5%, in line with the average “Magnificent Seven” tech stock, which contributes approximately 4% of portfolio risk, based on current index weights. As bitcoin’s allocation in a portfolio increases, its estimated contribution to risk becomes outsized, compared with those large-cap tech stocks. For example, a 4% allocation to bitcoin would account for 14% of portfolio risk, according to the paper.
Therefore, the white paper stated that an allocation to bitcoin of less than 2% would introduce a different source of return and risk, while managing risk exposure.
The paper’s authors—Samara Cohen, BlackRock’s CIO of exchange-traded-fund and index investments; Paul Henderson, a senior portfolio strategist; Robert Mitchnick, head of digital assets; and Vivek Paul, global head of portfolio research—wrote that bitcoin cannot be compared to traditional assets and that the main driver of the price of bitcoin will be an increase in adoption. Bitcoin is less correlated with major risk assets in the long term, with a very low correlation between bitcoin and equity returns, the authors wrote.
Institutional ownership of bitcoin could possibly dampen the asset’s volatility, but mass adoption could also dampen future returns, according to the paper.
“Broad adoption could also mean bitcoin loses the structural catalyst for further sizable price rises,” the paper stated. “The case for a permanent holding may then be less clear-cut and investors may prefer to use it tactically to hedge against specific risks, similar to gold.”
BlackRock noted the high volatility of the asset. Since 2015, there have been six times when bitcoin saw a drawdown of more than 70% from its previous high, including twice—in 2015 and 2019—when the asset had a drawdown of more than 80%.
“Taking all this into account, we do see a case for including bitcoin in multi-asset portfolios—provided you believe it will become more widely adopted in the future and are comfortable bearing the risk of potentially rapid price plunges,” the paper stated.
Bitcoin is becoming easier to own; several firms, including BlackRock, have launched ETFs which track the price of bitcoin. These bitcoin ETFs have seen $10 billion in inflows since the U.S. election on November 5, according to data from Bloomberg. In total, more than $100 billion has flowed into these ETFs, according to the white paper.
Some asset owners have included bitcoin ETFs in their portfolio, including the State of Wisconsin Investment Board, which allocated $160 million to two such ETFs, one from Grayscale and one from BlackRock.
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Tags: Asset Allocation, Bitcoin, BlackRock, BlackRock Investment Institute, portfolio
