Study: Bitcoin Allocations Above 2% Add Risk to PortfoliosStudy: Bitcoin Allocations Above 2% Add Risk to Portfolios
A study by Wilshire Indexes found that while higher allocations brought greater risk-adjusted returns, they also significantly increased risk concentration.
Bitcoin allocations in traditional portfolios that rise above 1% to 2% lead to a significant concentration of risk and should be carefully evaluated, according to a new study from Wilshire Indexes entitled “Traditional Asset Allocation with Digital Assets.”
Wilshire conducted its research by adding different proportions of Bitcoin to a series of equity and fixed-income asset allocation indexes and measuring the resulting risk-adjusted returns and marginal contribution to overall risk from all three asset classes included. The firm found that while Bitcoin allocations of 2% to 7% within traditional portfolios helped improve risk-adjusted returns, allocations of that scale made over 75% of the portfolio risk attributable to Bitcoin. In many of the studied portfolios, adding Bitcoin did not provide greater risk diversification. Rather, it shifted the risk from equities to Bitcoin.
As a result, Wilshire concluded that to reduce marginal risk exposure from Bitcoin to less than 50%, Bitcoin allocation in a traditional portfolio should range from 1% to 2%.
At present, many RIAs are avoiding investing directly in Bitcoin or other digital assets, though they’ve been more enthusiastic about Bitcoin ETFs. In WealthManagement.com’s conversations with RIA CIOs, some attributed their reluctance to invest in cryptocurrency to the assets’ volatility. For example, Tom Cohn, chief solutions officer at Cerity Partners, an RIA with approximately $120 billion in AUM, told WealthManagement.com, “We do not have any model allocation to cryptocurrency. It’s been an ongoing discussion with our investment committee. We ultimately found that the volatility of that asset class is difficult to put within a model portfolio.” Others noted that it is difficult to forecast expected returns with these types of digital assets.
“We don’t use any cryptocurrency exposure in our portfolios,” said Gina M. Beall, director of investment research at Savant Wealth Management, a national RIA with $28 billion in AUM. “It goes back to our evidence-based investing philosophy. In order to invest in an asset class, we want to be able to understand the historical data surrounding that asset class and the expected return. With those cryptocurrencies, there really isn’t a way for us to come up with an expected return. A company stock would generally have earnings—it doesn’t have earnings.”
According to FUSE Research Network, about 21% of surveyed financial advisors invest in cryptocurrency and digital assets today. However, over the next two years, 48% of advisors expect to start using them, especially in what’s considered to be a friendlier regulatory environment.
At the same time, “Optimizing portfolio construction is complicated, especially around emerging asset classes like crypto/Bitcoin,” wrote Cynthia Erickson Zarker, relationship manager with the firm, in an email. “Education will be a foremost priority, and asset managers will play an important role in helping advisors consider how to optimize the use of crypto/digital assets like Bitcoin in their clients’ portfolios.”
