What is the Recommended Bitcoin Allocation in Your Investment Portfolio by 2025, Suggests BlackRock, Remaining at 2%?
With Bitcoin (BTC) diving into new record highs and breaking past the $100,000 price barrier in December, it's no wonder that numerous investors are pondering over the advantages and disadvantages of incorporating this digital currency into their portfolio. But exactly how much of your portfolio should you be dedicating to Bitcoin?
A figure less than you might presume. As per BlackRock (BLK), the esteemed $11.5 trillion asset management firm behind the most popular spot Bitcoin ETF (the iShares Bitcoin Trust), the ideal allocation for most investors remains at a meager 2%.
Why a 2% Bitcoin allocation is sensible
BlackRock began by examining a conventional 60/40 portfolio (60% stocks, 40% bonds). Then, it ran simulations to gauge the impact of progressively adding higher amounts of Bitcoin to that portfolio, assessing how it affected its overall risk-reward profile. BlackRock assessed three potential Bitcoin allocations: 1%, 2%, and 4%.
If you assign 1% of your portfolio to Bitcoin, you'll reap the benefits of overall portfolio diversification. However, there might not be an adequate upside potential to warrant incorporating Bitcoin into your portfolio given the inherent risk and volatility associated with cryptocurrencies.
If you assign 4% of your portfolio to Bitcoin, the overall risk of your portfolio escalates significantly, and it begins to be over-reliant on crypto. Consequently, even if your stocks are thriving, a disappointing year for Bitcoin could knock your entire portfolio off balance.
A 2% allocation, in BlackRock's perspective, strikes the ideal balance: It provides sufficient diversification to lower your overall risk profile, and it still offers enough upside potential to justify adding it to your portfolio. With a 2% allocation, says BlackRock, you're essentially taking on the same degree of risk as investing in a prominent "Seven Wonders" tech stock, with the potential for higher returns.
As BlackRock highlights, those greater returns are attainable due to Bitcoin's escalating global adoption. The more that Bitcoin penetrates mainstream usage, the higher its price should soar. This is because the total lifespan supply of Bitcoin is capped at 21 million coins, and almost 20 million coins are already in circulation. Any boost in global adoption should fuel Bitcoin demand, leading to higher prices as well.
What is the optimal Bitcoin allocation?
At this point, you might be scratching your head. A 2% allocation to Bitcoin sounds quite meager, considering that some crypto investors – such as Bitcoin advocate Michael Saylor of MicroStrategy – advocate for going 'all-in' on Bitcoin. Moreover, earlier this year, Cathie Wood of Ark Invest concluded that the optimal allocation for Bitcoin should be 19.4%.
So what gives? The optimal Bitcoin allocation is highly subjective and depends on your risk tolerance and beliefs about Bitcoin's future growth potential.
If you believe that Bitcoin will eventually supplant the U.S. dollar and become the world's most significant asset – as Saylor does – then you might consider upping your allocation. The same goes for boosting your Bitcoin allocation if you believe that Bitcoin has a good chance of outperforming tech stocks over the long term – as Wood does.
On the other hand, if you think that Bitcoin is still too risky and volatile, then you might want to reduce your allocation to 1% or less.
In my opinion, the 2% allocation suggested by BlackRock is the 'just right' number: It's not too small, and it's not too big. You're taking on essentially the same level of risk as investing in a prominent 'Seven Wonders' tech stock, but with the potential for even more rewarding returns. For investors with a 60/40 portfolio, this approach certainly makes sense. It might be less reasonable for investors with a riskier portfolio (say, an 80/20 portfolio).
Impact of the Trump presidency
As BlackRock noted in its report, investors should keep in mind the potential impact of a Trump presidency when contemplating Bitcoin's future upside potential: "The surge in record highs following the recent U.S. election reflects investors upping the chances of greater adoption given President-elect Donald Trump's statements and team members supportive of cryptocurrencies."
Therefore, keep a close watch on developments in Washington D.C. If the Trump White House follows through on its pro-Bitcoin promises made during the campaign – such as the creation of a strategic Bitcoin reserve – then the pace of global Bitcoin adoption might accelerate dramatically over the next four years. And that, in turn, could trigger an entirely new evaluation of what the optimal Bitcoin allocation should be.
Based on BlackRock's analysis, investing 2% of your portfolio in Bitcoin could provide sufficient diversification to lower your overall risk profile while still offering potential for higher returns. This is due to Bitcoin's growing global adoption and the limited supply of its 21 million coins.
However, the optimal Bitcoin allocation can be subjective and depends on one's risk tolerance and beliefs about Bitcoin's future growth potential. For instance, some investors might choose a higher allocation if they strongly believe in Bitcoin's capacity to supplant the U.S. dollar or outperform tech stocks over the long term.
