In a recent paper released by the BlackRock Investment Institute, the world’s largest asset manager has highlighted Bitcoin’s potential role in multi-asset investment portfolios, suggesting a cautious approach to its allocation.
According to the report, a weighting of 1% to 2% in Bitcoin could provide a beneficial risk profile comparable to the “Magnificent Seven” technology stocks within a standard 60/40 portfolio of stocks and bonds.
BlackRock Advocates Strategic Bitcoin Weighting In Portfolios
The paper emphasizes that while Bitcoin can enhance portfolio diversification, exceeding a 2% allocation may significantly escalate overall portfolio risk. This guidance is particularly relevant as Bitcoin experiences unprecedented growth, recently surpassing the $100,000 mark.
The surge in value has been fueled by President-elect Donald Trump’s pro-crypto stance and his appointments of supportive figures to key government positions, leading to an influx of investment into Bitcoin exchange-traded funds (ETFs), including BlackRock’s own IBIT Bitcoin Trust.
Despite the impressive returns, the paper underscores Bitcoin’s notorious volatility, which necessitates a “risk budgeting” approach to portfolio construction.
Samara Cohen, BlackRock’s Chief Investment Officer for exchange-traded fund and index investments, noted that while the market’s leading crypto has a relatively low correlation with other assets, its high volatility means it contributes significantly to overall portfolio risk.
“A Bitcoin allocation would provide a diverse source of risk,” Cohen explained, contrasting it with an overemphasis on technology stocks that could lead to increased portfolio concentration.
A Double-Edged Sword For Investors?
Bitcoin’s performance has been massive, with a 140% increase observed this year alone. However, the cryptocurrency’s journey has not been without challenges; it has faced substantial drawdowns, historically ranging from 70% to 80% since its inception in 2009.
BlackRock Investment Institute’s report attributes part of this year’s rally to the launch of US spot Bitcoin ETFs in January after receiving approval by the US Securities and Exchange Commission (SEC), which have attracted over $113 billion in assets.
Since Trump’s election victory in November, about $10 billion has flowed into these exchange-traded funds, with BlackRock leading the way, signaling increased institutional interest.
Finally, BlackRock believes that increased BTC’s institutional acceptance over the coming months and years could help reduce volatility, allowing investors to explore higher holdings.
However, the authors caution that while such adoption might reduce risk, it could also dampen the cryptocurrency’s returns. They noted, “Should Bitcoin achieve broad adoption, it could potentially also become less risky – but at that point, it might no longer have a structural catalyst for further sizable price increases.”
At the time of writing, BTC is down a slight 1.1% over the past 24 hours, once again losing the $100,000 mark after continued failed attempts to consolidate above this key milestone. As a result, the market’s leading crypto is trading at around $99,666.
Featured image from DALL-E, chart from TradingView.com
