Bitcoin's Extreme Volatility Makes It a Risky Portfolio Addition, Despite Potential Returns
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Bitcoin is extremely volatile, with booms of 150-300% and busts of 64-74% historically. Even a small allocation can dramatically impact a portfolio's risk profile.
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At a 5% allocation, bitcoin contributes over 20% of a 60/40 portfolio's total risk and increases volatility by 16%. Higher allocations further concentrate risk.
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On paper, portfolios with bitcoin exposure had higher returns than a 60/40 portfolio over the last decade. But this assumes holding through 50%+ drawdowns.
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Bitcoin's correlation to equities has risen in recent years. It failed to diversify when stocks and bonds fell in 2022's "crypto winter."
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With new bitcoin ETFs, many will be eager to add exposure. But even a little can significantly alter the risk and return character of a portfolio.