BTC – To Include or Not to Include, That is the Question

No question Bitcoin has been on a tear this past year. But what data points would give a better picture of Bitcoin as an investment? In particular, let's take a look at it through the lens of systematic allocation engines and seeing what they are telling us about BTC allocation in the context of multi-asset portfolios. Pierre Mendelsohn, CEO of ALPIMA, offers this viewpoint into Bitcoin.

Would you invest in an asset which quadrupled in value last year?

What if I told you it produced 230% p.a. returns on average since 2010 (before fees), experienced several violent bubbles in the last ten years, that its annualised historical volatility is 102%, and maximum drawdown 93%?

Well, many people have invested, and a growing number of institutional investors have chosen to allocate a percentage of their broader portfolios to BTC, so much so that there is talk of mainstream adoption as gold 2.0.

In a market running high on emotions and ephemeral news, we thought it would be helpful to look at a few data points, especially around what systematic allocation engines are telling us about BTC allocation in the context of multi-asset portfolios.

1) Assuming you have no view on the future of BTC, how much would a risk-based model suggest allocating to BTC?

Using a USD-denominated basket of ten highly liquid sub-asset classes and adding BTC to it, the answer is between 0% and 2.6% depending on the allocation engine one choses, with an historical range of 0-7%.

While the Minimum Variance logic results in a zero BTC allocation today, it did contain some small allocation in the past. This suggests that BTC, despite its extreme volatility, brought sufficient diversification benefit to warrant an allocation in the portfolio, albeit below 0.5%, a few times in the last nine years.

2) What would a small BTC allocation have done to a multi-asset portfolio’s risks and returns?

BTC’s numbers are so extreme that even a small, intermittent allocation produced noticeable results.

For example, here is the MDP (Maximum Diversification) portfolio with and without BTC.

A few observations stand out:

  • Historical results are very dependent on the period chosen, with the best results produced in the last 5Y, and the worst results in the last 3Y.
  • While BTC historically increased the simplified Sharpe ratio of the portfolio, it also increased drawdowns by 1.14%, i.e. 14% on a relative basis, a risk some investors will not be prepared to accept.

It is important to note that this analysis is based on the XBTUSD index. It does not include transaction and management fees, which can be substantial.

This does not alter the key point, which is that even a small BTC allocation caused noticeable differences in historical returns. A BTC allocation in the portfolio helped increase the risk /return trade-off in the portfolio, especially so in the last five years or more, but it also increased drawdowns.

Tools such as forward-looking Monte Carlo simulations can help provide additional colour as to the impact of BTC on the future distribution of portfolio returns. Critical points to consider when doing such work include the return distribution and correlation assumptions for BTC.

3) What is the correlation of BTC with other assets, and how did it change over time?

Since July 2012, BTC has displayed a small, negative correlation to US treasuries across the yield curve, and a very small positive correlation to equities and other sub-asset classes, USD corporates and TIPs included. This can be seen in the bottom half of the chart below (blue rectangles).

Over the last six months, BTC has shown similarly low negative correlations to US treasuries, but notably higher correlations to other assets, with a 32% correlation to gold and a 27% correlation to US equities, arguably making it a less effective diversifier that in years past.

A review of daily performance contribution over the last year corroborates this point. The days in the last twelve months when BTC had the worst performance were also down days for US and international equities. This is why BTC increased, rather than decreased, drawdowns in the portfolio. Bitcoin’s behaviour during the COVID-induced period of extreme market turbulence in March and April 20 is the culprit.


While the case for buying BTC on its own may look questionable, the picture is more nuanced for longer-term investors and asset allocators.

Risk-based asset allocation models do not allocate to BTC because of its recent performance and abundant news feed. They do so because, historically, BTC was an uncorrelated asset class which brought a measurable diversification benefit to multi-asset portfolios.

Going forward, BTC will attract further interest only if (a) it does not self-destruct, (b) it can remain uncorrelated to traditional assets and, therefore, continue to bring an observable diversification benefit to multi-asset portfolios.  If so, and this is not a small if, we would expect it to gradually become less volatile as it becomes more widely accepted.

The initial growth of BTC was fuelled by short-term investors and speculators. Its long-term success from here depends on its durable adoption by longer-term investors and asset allocators. 

This article,”BTC – To Include or Not to Include, That is the Question,” first appeared on the ALPIMA website on January 14 2021.

Photo Credit: by btckeychain is licensed under CC BY 2.0

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Pierre Mendelsohn is CEO of ALPIMA, which he founded in 2014 to give professional and institutional investors a new service focused on rule-based investing and asset allocation. Since then, Mr. Mendelsohn, along with his team, designed and built the ALPIMA platform around the concept of Object-Oriented Investing.
Prior to founding ALPIMA, he worked for two decades with leading investment banks in New York, London and Hong Kong in global markets (Morgan Stanley, Merrill Lynch, Bankers Trust), focusing on quantitative investment strategies (QIS) and derivatives, in origination, structuring, sales, management and senior management roles.
Along with his teams, he has launched numerous investment products and systematic strategies which, in total, collected tens of billions of dollars from institutional and HNW clients globally.

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