Case in point: Millson found that adding a 1% or 2% allocation to Bitcoin to a 60/40 portfolio contributed from 9% to 24% to total risk, while volatility was barely affected.
As expected, however, greater exposures to Bitcoin had more impact. An allocation as small as 5% contributed more than 60% of the portfolio’s risk and increased volatility by about 70%. The higher the allocation, the higher both risk and volatility.
3. Nerves of Steel
Will investors and their advisors hold onto crypto in volatile times despite returns? From mid-April through June 25, 2021, Bitcoin fell 50%, which “isn’t a new phenomenon” for the cryptocurrency, Millson states.
Those who could hold on at those times may have “reaped the benefits,” he adds. But is it worth it? He states that a balanced portfolio with a 5% allocation to Bitcoin over the past decade had just over a 15% return when sourced either from bonds or equities. That outpaced a 60/40 portfolio of 7.3%. During that 11-year period, however, the CMBI Bitcoin index had peak-to-valley drops ranging from -41% to -93%.
The non-Bitcoin 60/40 portfolio returned about 6.8% on average during these Bitcoin stress periods, Millson states. And during the pummeling of Bitcoin from April through July 25, the standard 60/40 portfolio gained 1.9% while the Bitcoin-infused portfolio “trailed that mark by three percentage points. It can be difficult to stick with portfolios that are struggling when stocks and bonds are doing well,” he states.
4. Correlation Rising?
One plus of adding Bitcoin to a portfolio has been its lack of correlation to stocks and bonds. However, Millson found that recently, Bitcoin’s rolling correlation to the broader equity markets hovers between 0.25 and 0.35. “Yes, that’s still low and it may fall back to near zero again, but it’s still notable,” he says.
That said, if there is a “sustained shift” of correlation, “the importance of where the allocation is sourced increases.”
He concludes that those investors — or advisors — considering adding Bitcoin to a portfolio must keep in mind the product’s volatility, noting that “although past performance may look particularly strong, it is no indication of future results.”