Matt Hougan, the Chief Investment Officer of Bitwise, shared his insights on the optimal structure of a traditional investment portfolio that includes a Bitcoin allocation. The expert emphasized that adding cryptocurrency to a portfolio should be done thoughtfully, carefully analyzing the overall asset structure and the risk-return ratio.
This is reported by Business • Media
Bitcoin’s Volatility and Correlation with Traditional Assets
According to Hougan, Bitcoin is a highly volatile asset, with its fluctuations being three to four times greater than that of the S&P 500 index. However, this does not mean that including cryptocurrency significantly increases the risks of the entire portfolio.
“Bitcoin is an extremely volatile asset. Using the most common metric, its volatility is about three to four times higher than that of the S&P 500 index. However, this does not mean that adding Bitcoin to a portfolio makes it significantly more volatile,” Hougan stated.
He noted that Bitcoin has a low correlation with stocks and bonds, which allows its inclusion to simultaneously enhance portfolio returns while reducing overall risks.
Portfolio Optimization Considering Bitcoin
Hougan analyzed various asset allocation scenarios. In particular, he compared a classic portfolio (60% stocks, 40% bonds) with portfolios where the Bitcoin allocation is 1%, 2.5%, and 5%. It turned out that the portfolio with 5% Bitcoin (with 57% stocks and 38% bonds) showed the highest returns from 2017 to 2024 with only a slight increase in volatility—less than 1%.
The expert also proposed an alternative approach: to reduce the stock allocation, increase the bond allocation, and raise the Bitcoin share. This option allows for a significant reduction in volatility with only a minor decrease in income. For example, by reducing the stock allocation to 40%, increasing bonds to 50%, and Bitcoin to 10%, over seven years the portfolio’s return reached 298.14%, while volatility was 12.48%. In comparison, the portfolio with 57% stocks, 38% bonds, and 5% Bitcoin had returns of 207.37% and volatility of 12.54%, respectively.
Hougan acknowledges that this strategy has been effective due to Bitcoin’s high returns in previous years but emphasizes that investors should adjust their portfolio structure when adding the first cryptocurrency.
Moreover, as the expert points out, risks can be further reduced by adding more low-risk securities to the portfolio, such as short-term U.S. Treasury bills (T-bills).
It is worth noting that Matt Hougan actively shares his investment recommendations regarding cryptocurrencies, urging a cautious approach to diversifying digital assets.