Bitwise CIO: Rethinking Bitcoin Allocation Could Optimize Portfolio Risk and Return

Bitcoin’s volatility is often the reason traditional investors hesitate to integrate it into long-term portfolio strategies. Yet Matt Hougan, Chief Investment Officer at Bitwise Asset Management, argues that Bitcoin’s inclusion doesn’t have to mean embracing higher risk.

Instead, Hougan suggests a shift in how the asset is positioned within traditional portfolios may deliver stronger performance while maintaining, or even reducing, overall volatility.

Alternative Allocations and Adjusted Risk Exposure

In a recent note to clients, Hougan revisited common methods for integrating Bitcoin into a 60/40 stock-to-bond portfolio. The standard model involves reallocating a small percentage, usually 1% to 5%, from stocks and bonds into BTC.

Historically, this strategy has produced higher returns with only marginal increases in portfolio volatility, thanks in part to BTCs low correlation to both equities and fixed-income assets.

But Hougan is now proposing a more nuanced approach, one that considers broader changes in asset weighting to manage risk more intentionally.

Rather than simply reducing both stocks and bonds to make room for BTC, Hougan explores alternative allocation models that actively rebalance risk across the portfolio.

One such model suggests adding Bitcoin exposure while simultaneously increasing bond allocation, and shifting bond holdings into short-term Treasury bills to further reduce duration risk.

This method, he explains, may better align with how risk-sensitive investors behave in practice, adjusting one part of the portfolio to offset added exposure elsewhere.

When applied to historical data from January 1, 2017, to December 31, 2024, a portfolio with 5% BTC and increased bond weighting produced improved returns with lower volatility than traditional portfolios that did not include Bitcoin at all.

Hougan also presented a version that allocated 10% to Bitcoin, 50% to bonds, and reduced equity exposure to 40%. This portfolio showed the highest return among the four examples, while maintaining lower risk than a standard 60/40 allocation with only 5% Bitcoin exposure.

A Broader View of Bitcoin’s Role in Portfolio Construction

Hougan’s analysis is based on a core observation: BTC’s historically low correlation with traditional asset classes makes it a potentially valuable addition when considered within the broader structure of a portfolio.

Rather than viewing it as a standalone bet, he encourages investors to think in terms of a “risk budget” and consider how other components of the portfolio, such as duration risk or equity exposure, can be modified to accommodate BTC in a more balanced way.

While past performance does not guarantee future returns, the findings add to a growing body of research suggesting that digital assets may enhance traditional investment strategies under the right conditions.

With Bitcoin continuing to gain regulatory recognition and institutional acceptance, its evolving role in diversified portfolios remains a topic of active exploration.

For investors and advisors seeking to understand how digital assets can fit into long-term financial plans, the emphasis may be shifting from whether to include Bitcoin at all, to how to do it most effectively.

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