Bitcoin is known for its high volatility. When measured by standard volatility metrics, its price swings are typically three to four times greater than those of the S&P 500.
But that doesn’t necessarily mean adding Bitcoin to your portfolio will dramatically increase its overall risk. In fact, many proponents—myself included—point out that Bitcoin has historically exhibited low correlation with both stocks and bonds. This characteristic means that, in the past, even a small allocation could potentially improve returns without significantly raising portfolio risk.
A common approach to illustrate this is to start with a traditional 60/40 portfolio—60% stocks and 40% bonds—and then shift a small portion into Bitcoin.
The table below compares the risk and return metrics of portfolios with 0%, 1%, 2.5%, and 5% Bitcoin allocations between January 1, 2017, and December 31, 2024. These simulations were conducted using a freely available portfolio backtesting tool.
Performance Metrics by Bitcoin Allocation
| Allocation | Total Return | Standard Deviation (Risk) |
|---|---|---|
| 0% Bitcoin | 107% | 11.3% |
| 1% Bitcoin | 117% | 11.4% |
| 2.5% Bitcoin | 145% | 11.8% |
| 5% Bitcoin | 207% | 12.5% |
Source: Bitwise Asset Management, Bloomberg. Data covers January 1, 2017, to December 31, 2024. Stocks represented by SPDR S&P 500 ETF Trust (SPY). Bonds represented by iShares Core US Aggregate Bond ETF (AGG). Bitcoin represented by spot price. Assumes no taxes or transaction costs. Past performance does not guarantee future results.
As you can see, even a modest 5% Bitcoin allocation more than doubled the total return—from 107% to 207%—while only moderately increasing volatility.
This type of analysis is compelling and aligns with how many investors think about adding Bitcoin exposure. But recently, I’ve been asking: Is there a better way?
Can You Increase Returns While Reducing Risk?
Many people deeply involved in crypto structure their personal portfolios differently than the incremental approach shown above. In my experience, crypto enthusiasts often use a “barbell” strategy: a large allocation to crypto, a large allocation to cash or money market funds, and very little in between.
My own portfolio, for example, is roughly split equally among crypto, stocks, and cash. (I’m not necessarily recommending this—just being transparent!)
This made me wonder: When adding Bitcoin to a portfolio, does it make sense to compensate by reducing risk elsewhere?
In the earlier example, we made room for a 5% Bitcoin allocation by proportionally reducing the 60/40 mix—taking 3% from stocks and 2% from bonds.
But what if, instead, we:
- Allocated 5% to Bitcoin,
- Increased the bond allocation by 5% (reducing stock exposure), and
- Shifted some bond holdings from broad-market bonds to shorter-term Treasuries to further reduce interest rate risk?
Let’s call this “Portfolio 3.”
Performance Comparison: Portfolio 3 vs. Others
| Portfolio | Total Return | Standard Deviation |
|---|---|---|
| 1 (0% Bitcoin) | 107% | 11.3% |
| 2 (5% Bitcoin) | 207% | 12.5% |
| 3 (Adjusted Mix) | 210% | 11.9% |
Source: Bitwise Asset Management, Bloomberg. Same date range and assumptions as above.
Notice that Portfolio 3 delivered slightly higher returns than Portfolio 2, and did so with lower volatility.
This raises an interesting question: What happens if we push this idea further?
What About a 10% Bitcoin Allocation?
Let’s consider a fourth portfolio:
- 40% stocks (reduced from 60%),
- 50% bonds (increased from 40%, with a tilt toward short-term Treasuries),
- 10% Bitcoin.
Portfolio 4: 10% Bitcoin Allocation
| Metric | Value |
|---|---|
| Total Return | 248% |
| Standard Deviation | 12.1% |
Source: Bitwise Asset Management, Bloomberg. Same period. “Broad bonds” represented by AGG; “T-bills” by SPDR Bloomberg 1-3 Month T-Bill ETF (BIL).
Compared to Portfolio 2 (5% Bitcoin, 57% stocks, 38% bonds), Portfolio 4 delivered higher returns with lower risk.
Of course, past performance is no guarantee of future results. Bitcoin’s extraordinary returns during this period may not repeat. But the data highlights an important idea: When adding Bitcoin, consider it in the context of your entire risk budget. You might be surprised by the outcome.
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Frequently Asked Questions
Why is Bitcoin considered a good portfolio diversifier?
Bitcoin has shown low correlation to traditional assets like stocks and bonds. This means it often moves independently, which can help reduce overall portfolio volatility and improve risk-adjusted returns.
How much Bitcoin should a typical investor allocate?
There’s no one-size-fits-all answer. Conservative investors may start with 1-3%, while those comfortable with higher risk might consider 5% or more. Always align allocation with your risk tolerance and investment goals.
What are the risks of holding Bitcoin?
Bitcoin is highly volatile, regulatory changes can impact its value, and it’s still a relatively young asset class. Investors should be prepared for significant price swings.
Can I use ETFs to gain Bitcoin exposure?
Yes, Bitcoin ETFs provide an easy way to invest without holding Bitcoin directly. They offer liquidity, regulatory oversight, and integration with traditional brokerage accounts.
How do I rebalance a portfolio with Bitcoin?
Set target allocations for each asset, including Bitcoin. Periodically review and adjust to maintain these targets, especially after large price moves. This helps manage risk and lock in gains.
Is Bitcoin a good inflation hedge?
Some investors view Bitcoin as a store of value similar to gold, but its effectiveness as an inflation hedge is still debated. Historical data is limited, and its price is influenced by many factors beyond inflation.