In this way, the cryptocurrency reduces the volatility of the portfolio

Bitcoin occupies a prominent position within and outside of the crypto world. BTC was not only the first cryptocurrency to get the ball rolling with Satoshi’s white paper, but to this day it has by far the greatest market dominance in the crypto world, not least due to its unique properties.

Digital gold is often compared to traditional assets as it is considered the locking pinnacle and the main beacon of the crypto world. It quickly becomes apparent that Bitcoin has recorded an impressive performance in recent years, which even dwarfs the performance of stocks.

Many comparisons show that an investment in Bitcoin was very lucrative, but also correspondingly risky. Investors have therefore had to show strong nerves in the past due to the high volatility and sharp price declines.

Below we take a more nuanced look at Bitcoin’s volatility. We show how the risk-return profile of a diversified portfolio can be improved with BTC without significantly increasing volatility.

Anyone who invested in Bitcoin in the past needed strong nerves. This was not just due to the undifferentiated reporting in some media, which literally “beat” Bitcoin. Massive downturns of over 80 percent have also hit investors hard at times.

But the analysis shows that Bitcoin’s periods of weakness were usually quickly recovered and the digital gold was able to deliver a positive return again after only a short period of time. Those who sat out the short periods of weakness and persevered were, in most cases, rewarded with high returns. This was particularly true if the investment was spread over a longer period of time, such as through a savings plan. This made it possible to compensate for unfavorable entry phases, such as during the last all-time high in November 2021.

Integrating Bitcoin into a diversified portfolio

For many people, giving a single asset like BTC such a high weighting in the portfolio is not an option for various reasons. The question therefore arises as to how BTC can be integrated into a diversified portfolio. Especially in light of current developments such as the Bitcoin ETF, which will further increase accessibility and adoption.

The asset manager VanEck investigated exactly this question and examined what influence the addition of a small percentage has on the risk-return profile of a classic 60/40 portfolio of stocks and bonds.

The results of the study over a period of more than 10 years are astonishing. Bitcoin has greatly improved the risk-reward profile of a classic 60/40 portfolio without significantly increasing the portfolio’s volatility.

To put it simply: The return on the portfolio was significantly improved in some cases, while the risk remained almost the same.

Conclusion: BTC volatility can be beneficial for investors

Bitcoin is a volatile asset and will remain volatile for the foreseeable future. Investors often equate volatility with risk, but volatility can be viewed from different perspectives.

Bitcoin investors with a low risk tolerance can use the insights from this article and consider the following:

1. Past performance never allows conclusions to be drawn about the future. This also applies to Bitcoin. In particular, the outstanding performance in the early days is unlikely to be repeated to this extent. Nevertheless, the current developments surrounding BTC suggest that it may still be worthwhile for everyone to think about allocating Bitcoin in their own portfolio in the future.

2. When allocating Bitcoin in your own portfolio, you should expect that there will be setbacks in the future. These can be as strong as in the past. It can help investors to know that setbacks in the past were usually recovered within a short period of time. It therefore makes sense to focus on a long-term investment horizon and not react to short-term fluctuations. Investing through a savings plan can be particularly helpful and spread the risk.
3. The right mix of Bitcoin in a diversified portfolio can improve the risk-reward profile without significantly increasing volatility. Research shows that an allocation of 3 percent is enough to improve the risk-return profile.

Disclaimer: The contents of this article are not an investment recommendation. Anyone acting on the basis of this information does so at their own risk. Neither the author of the article nor the operator of this site can be held liable for damages.