- BlackRock says investors interested in bitcoin should allocate 1%-2% of their portfolio to the token.
- That amount would generate risk comparable to holding assets like the Magnificent Seven stock.
- The firm says that while volatile, bitcoin offers a diverse source of risk for portfolios.
Bitcoin deserves a spot in traditional multi-asset portfolios for interested investors, but only to a “reasonable” extent, BlackRock said on Thursday.
The world’s largest asset manager said that investors interested in bitcoin should allocate 1%-2% of their portfolio toward the cryptocurrency. Such weighting would result in a similar level of risk to holding the Magnificent Seven mega-cap stocks in a traditional portfolio.
“In a traditional portfolio with a mix of 60% stocks and 40% bonds, those seven stocks each account for, on average, about the same share of overall portfolio risk as a 1-2% allocation to bitcoin,” analysts in a recent research note from Blackrock Investment Institute.
“We think that’s a reasonable range for a bitcoin exposure,” they added.
A share over 2%, though, would make the risk associated with the crypto much higher, it added.
“Going beyond that would sharply increase bitcoin’s share of the overall portfolio risk,” the analysts said.
The firm said that the framework is helpful for considering the potential risks of including bitcoin in a portfolio given its reputation for volatility. The cryptocurrency has soared in recent weeks, up 48% since Donald Trump won the US presidential election last month/
Trump has since picked several crypto supporters for posts in his administration, including Paul Atkins as chair of the Securities and Exchange Commission. That announcement last week helped push bitcoin above the key $100,000 threshold for the first time ever.
The cryptocurrency has gained about 136% this yea.
“On top of having higher average volatility over time, bitcoin has also suffered sharp selloffs. In an extreme case, should there no longer be any prospect of broad bitcoin adoption, the loss could be the entire 1-2% allocation,” they said.
However, the analysts said allocating up to 2% to bitcoin would provide a diverse source of risk compared to pouring into mega-cap tech stocks while still managing risk exposure.
“Even though bitcoin’s correlation to other assets is relatively low, it’s more volatile, making its effect on total risk contribution similar overall. 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,” the analysts said.
They added that wider adoption and trading of the cryptocurrency could reduce its volatility, bringing down its share of portfolio risk and potentially allowing investors to increase their allocation.
On the flip side, broader adoption could also mean it loses the structural catalyst for big price gains, they said.
“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,” they said.
Broader adoption and trading appear likely, given easier avenues for gaining exposure to bitcoin, like the dozen spot bitcoin ETFs from firms including BlackRock. Since they were launched in January, the ETFs have garnered over $113 billion in assets.
