Bitwise CIO says don't add bitcoin to traditional portfolios in isolation — rethinking its role can boost returns and cut risk

While bitcoin is renowned as a highly volatile asset, three or four times that of the S&P 500, Bitwise Chief Investment Officer Matt Hougan says rethinking its role in traditional portfolio strategies can boost returns and reduce risk.

Because bitcoin has a low correlation to both stocks and bonds, even small allocations to a traditional 60/40 stocks and bonds portfolio have historically boosted returns with only modest risk, Hougan wrote in a note to clients late Tuesday. For example, a 5% bitcoin allocation from 2017 to 2024 (by reducing stocks to 57% and bonds to 38%) raised total returns from 107% to 207%, while standard deviation volatility rose just slightly — from 11.3% to 12.5%.

Hougan acknowledged that many in the crypto space did not manage their personal portfolios like this and preferred barbelled structures, such as a large allocation to crypto and cash or money market funds, with little in between.

Nevertheless, he argued that for the traditional portfolio investor, there is a better way to generate even higher returns with less risk by compensating for the addition of bitcoin elsewhere.

Don't add bitcoin in isolation

Revisiting his example, if investors still allocated 5% to bitcoin but also increased their bond exposure by 5%, it would, in theory, reduce equity risk, Hougan said. By also rotating from broad-based asset bonds to short-term Treasury bills, the bond risk would also be theoretically reduced, he added.

Based on the historical data, the adjustment would have generated higher returns than the standard 60/40 portfolio and roughly the same as his first example — but with less risk than either. Taking that even further and considering a portfolio that cuts equity exposure to 40%, increases bond allocation to 50%, and adds 10% in bitcoin, greater returns and less risk than the first example would have been generated, Hougan demonstrated.

"Of course, there’s no guarantee this will persist in the future — bitcoin's early returns were extraordinary, and future returns may not match the returns during this study," Hougan said. "But the data reinforces something important: When you think about adding bitcoin to a portfolio, don't do it in isolation. Think about it in the context of your entire risk budget. You might be surprised at the results."