Caitlin Long, founder and chief executive officer of Custodia Bank, speaks during the Bitcoin 2023 … [+]
Despite the negative headline, a recent Morningstar article published this month highlighted the power of adding bitcoin to a portfolio. According to their research, a 5% allocation to bitcoin in a traditional 60% Stock, 40% bond portfolio would increase the Sharpe Ratio, a measure of risk adjusted return, from .77 to .96, an increase of nearly 25%.
This article was not all positive however. “A 1% allocation to bitcoin… can quickly spiral into a 60% allocation if investors fail to reap what they’ve sown,” the author stated, citing the difficulty they may experience when trying to rebalance their portfolios. Though the author did not respond to requests for comment, the rebalancing concerns cited may be the variable holding back many investors from taking the plunge.
This article comes in the wake of newfound interest in a 2022 BlackRock publication that found the optimal bitcoin allocation to be a whopping 85%. Though rebalancing may be difficult, the long-awaited bitcoin ETF approvals may make it easier for traditional investors to jump in.
Raphael Zagury, CIO of Swan Bitcoin is working to educate those who would seek to use bitcoin as a portfolio strengthening asset. His website, Nakamoto Portfolio, is an open-source and free to use tool which can help financial professionals model the effect of bitcoin on a portfolio.
Zagury created the website after producing a one-page report for a friend, similar to what hedge funds produce to show their periodic returns. “He started looking at bitcoin much like another investment in his portfolio, setting aside some of his fundamental doubts,” Zagury said about the initial report.
After his report convinced the friend to take the plunge, Zagury decided to create the website as a tool for institutional investors. It is being well received by institutions, showing them how a bitcoin allocation can improve their risk adjusted returns according to Zagury.
“The key is sizing it appropriately… [the website] can walk them through different allocations in real time and they can see the results,” he concluded. By speaking in the language of financial mathematics, Zagury is optimistic that the narrative surrounding bitcoin will start to change for the better, especially in the institutional space.
