Sizing bitcoin in portfolios

Bitcoin’s key value drivers

Predetermined supply & demand: Bitcoin’s fixed issuance schedule means value depends almost entirely on demand, which is shaped by investor confidence in bitcoin’s potential to become more widely adopted. Case in point: Bitcoin’s run-up to record highs after the U.S. election result reflects investors upping the chance of greater adoption given President-elect Donald T rump’s statements and personnel picks supportive of cryptocurrencies.

Adoption inflection: We believe the greatest return potential lies in the period before widespread adoption, when expectations and narratives may drive repricing.

So, what could spur wider adoption of bitcoin?

Geopolitical fragmentation: In an era of geopolitical fragmentation, bitcoin’s decentralized nature and cross-border utility could enhance its appeal.

Diversification: Since the drivers of bitcoin’s value are quite different than those for other assets, bitcoin may be less correlated with major risk assets over the long term.

Risks to consider

Investors should also be alert to bitcoin’s risks.

Extreme volatility: Bitcoin remains highly volatile and vulnerable to sharp selloffs. Over its short history, bitcoin has seen major selloffs of 70-80% from peak to bottom during its climb to record highs.

Unstable correlations: Bitcoin’s correlation with stocks has typically been low in the short history available. Yet there’s been brief periods when bitcoin’s value has followed risk assets much more closely. This shows that investors may not be able to rely on it as reliable cushion against risk-off sentiment hitting other parts of the portfolio.

Structural uncertainty: Bitcoin may not ultimately achieve broader adoption which could impair value potential.

Implications for portfolios

We think there’s a case for including bitcoin in multi-asset portfolios – provided investors believe it will become more widely adopted in the future and are comfortable bearing the risk of potentially rapid price plunges.

So how can investors think about a bitcoin allocation?

Risk budgeting: We use a risk budgeting approach: sizing the allocation based on how much it would contribute to total portfolio risk – measured by its long-run volatility and correlation to other assets. A 1–2% allocation contributes to overall portfolio risk at levels comparable to a single “Magnificent 7” stock in a 60/40 portfolio.

^{Past performance is not a reliable indicator of current or future results. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise - or even estimate - of future performance. Source: BlackRock Investment Institute with data from Bloomberg, December 2024. Notes: The chart shows bitcoin’s share of portfolio risk in a hypothetical 60-40 stock-bond portfolio at different allocations based on risk contribution. It also shows what share “magnificent 7” stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) add to overall risk on average based on their current index weights. Indexes used: Bloomberg Developed Markets Large and Mid Cap for equities and the Bloomberg Global Aggregate for bonds. Risk contribution is estimated using weekly returns between May 2012 and July 2024. Reference to individual stocks is for illustrative purposes and should not be construed as investment advice or a recommendation.}

Setting a 2% cap: Allocations beyond 2% elevate portfolio risk disproportionately, given bitcoin’s volatility and unstable correlations.

Tactical use: If broad adoption occurs, bitcoin could become less volatile and have a more stable low correlation with stocks. But widespread adoption would dull bitcoin’s key driver for further sizable price rises. It would also make the case for a permanent holding less clear and investors may prefer to use it tactically to hedge against specific risks, in a similar fashion to gold.

The BlackRock take

For institutional investors with sufficient governance and risk tolerance, we believe a portfolio allocation of around 1-2% to bitcoin could be reasonable – provided investors believe in its widespread adoption. Larger allocations would skew portfolio risk excessively, we find. Ultimately, its investment case depends mostly on the potential for future widespread adoption.

We think investors who choose to allocate to bitcoin should regularly review bitcoin’s changing nature and their allocation.