Bitcoin In A Portfolio

MUCH  has been written and discussed about Bitcoin since it first launched 15 years ago in 2009. And I make no "news" here by pointing out that much of the discussion has been negative, focusing on the risk associated with it as "a new and untested" asset. 

Yet despite this negativity, Bitcoin has persisted as an asset. 

And as it has persisted, many of the most vocal and outspoken of its detractors -- including the heads of many major banks and investment houses -- have come around to offering investment services in the very digital assets that they so roundly criticised early on -- most recently enabling a wider population of investors to access Bitcoin through an ETF (Exchange Traded Fund) in regular brokerage accounts.

As such, after 15 years, RLCM believes it is both plausible and relevant to consider crypto's value as an investment, and to analyze what its inclusion in an overall portfolio strategy might be over what is generally accepted as a long term investment time frame -- once a 10-year track record for an asset is in place.


THERE  are many thoroughly researched studies in this area now available, and one that we believe summarizes our attitude and approach to including it in our offerings of portfolio services at RLCM was done by Two Ocean Trust, a firm that provides digital asset services to private clients and advisors out of Jackson Hole, Wyoming. The full article can be found at: 

But the relevant point is that when looked at objectively, including Bitcoin as a small percentage of a portfolio over time not only does NOT increase risk in any appreciable way, but actually lowers volatility and increases return.


SPECIFICALLY, to summarize the article's points:  

"Adding imperfectly correlated assets to a portfolio can reduce overall volatility and increase risk adjusted returns. The practical challenge for traditional investment portfolios is that there are very few assets that offer a persistent lack of correlation to equity and fixed income securities over long periods of time. Bitcoin is a unique exception.

The correlation between bitcoin’s daily returns and those of the 60/40 portfolio (i.e. 60% stocks / 40% bonds) was 0.29, 0.21, and 0.11 over the past 3-, 5-, and 10-year periods, respectively.

Contrary to currently popular belief, this indicates almost no correlation between bitcoin and the returns of traditional assets.

Thanks to this imperfect correlation, a small allocation to bitcoin can result in no added risk to a portfolio. An allocation of up to 5% in bitcoin over the past 3-, 5-, and 10 years resulted in no measurable increase in the risk of the portfolio

Bitcoin presents a compelling investment case when viewed through the lens of traditional wealth management.  Allocating just 5% to bitcoin substantially improved the risk adjusted returns of a traditional investment portfolio, increasing 3-, 5-, and 10-year annualized returns by 700-1,000 basis points while adding no measurable risk to the portfolio." 


RLCM  has studied these results, as well as those of other comparable areas of research, and has concluded, as we say in our mission statement, that managed responsibly, a measured allocation to Bitcoin within a portfolio's overall investment strategy can be both appropriate and beneficial to clients willing to educate themselves and add this new asset category to their managed portfolios.

As just a brief example of our thinking, if a portfolio of, say, $10,000 were to allocate 2%, or $200 to Bitcoin, and Bitcoin were to lose the oft cited possible 50% of its value, as it has several times in recent years, that overall portfolio would suffer just a $100, or 1% drawdown. Hardly catastrophic to a portfolio, and keeping in mind that the stock market will often move 1% in a single day, this loss could actually be considered negligible and more than likely temporary.

On the other hand, if Bitcoin were to move up 100%, as it's also done multiple times over the course of its 15-year history, and in fact more often than the cited 50% loss event, that same 2% allocation in our example portfolio would cause the portfolio to appreciate by $200, or twice the dollar amount of the 50% loss.

The shift toward the positive benefit of the Bitcoin allocation suddenly takes on a demonstrable value-added component.

This is why we advocate for a responsibly managed approach to holding this asset for the long term in a portfolio. The temporary short term volatility needs to be accepted and dealt with professionally, which is to say not emotionally, and allowed to work to the investor's advantage over time, where the odds actually have been shown to improve a risk adjusted return, not damage it.




Richard Lees and clients of Richard Lees Capital Management may be long the cryptocurrency mentioned in this article. Clients invested in any of RLCM's managed digital portfolios have undergone thorough risk evaluation to deem these investments appropriate for them, as should anyone considering speculative investments.


Richard Lees, author of this article and portfolio manager for RLCM clients, has attained the Certified Digital Asset Advisor (CDAA) designation.


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