Yesterday, a report by BlackRock was released in which it is argued that it is reasonable to consider an allocation between 1% and 2% of the portfolio on Bitcoin.
Although BlackRock is not impartial in this case, given that it obviously suggests an allocation through its ETF IBIT, its statements should be taken seriously, as it is still the largest asset manager in the world.
Summary
The official BlackRock report: the optimal allocation of Bitcoin in the portfolio
The report, titled “Sizing bitcoin in portfolios,” was published on the official website of BlackRock.
It was drafted by the BlackRock Investment Institute, so it is in all respects an official and public report of BlackRock.
The authors are the Chief Investment Officer of ETFs and Index Investments at BlackRock, Samara Cohen, the Senior Portfolio Strategist, Paul Henderson, the Head of Digital Assets, Robert Mitchnick, and the Head of Portfolio Research, Vivek Paul.
It is a five-page PDF, to be honest not particularly rich, but still in-depth.
The theory on Bitcoin allocation
In particular, the report contains a chart, titled “Sizing bitcoin in portfolios,” in which the estimated percentages of the contribution to risk in a 60/40 portfolio are shown.
While explicitly stating that these are not investment recommendations, and that past performance is not a reliable indicator of current or future results, the chart shows the risk share of the portfolio allocated in Bitcoin in a hypothetical 60-40 stock-bond portfolio, compared with that of the “magnificent 7” (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla).
The risk contribution was estimated using the weekly returns between May 2012 and July 2024. The
What emerges is that the share allocated to Bitcoin ranges from 1% to 4%, passing through 2%.
The authors add, however, that if Bitcoin were to achieve widespread adoption in the future, it could also potentially become less risky. At that point, however, it might no longer have the strength to register further significant price increases.
They conclude by saying:
“The case for a long-term holding might therefore be less clear, and investors might prefer to use it tactically to protect themselves from specific risks, in a manner similar to gold”.
The drivers of Bitcoin’s value
The report also contains a chapter titled “The drivers of Bitcoin value”.
In this chapter, the authors write that the value of Bitcoin increases when its predetermined supply meets a growing demand. They also specify, of course, that the demand changes based on the evolving conviction of investors regarding the potential of Bitcoin to be more widely adopted.
Therefore, according to the authors of the report, in the case of investments in Bitcoin, the potential for future widespread adoption is central.
In this regard, they add:
“We believe that the period leading to large-scale adoption is where the greatest potential for future returns may reside”.
At this point, they begin to consider what the drivers might be that could guide such adoption.
First of all, they state that Bitcoin allows smooth and practically instantaneous cross-border transactions. Furthermore, they highlight how anyone can participate because it is decentralized, and without the direct ability of governments to increase or decrease the supply.
Finally, however, they admit that, in the end, there is always the risk that it will never be widely adopted.
The reasons for a 2% allocation
The strategy of allocating 1% or 2% of capital in Bitcoin is based on the assumption that one believes it will be more widely adopted in the future, and that one is willing to endure the risk of potential rapid crashes. In fact, the authors of the report still invite investors to balance the pros and cons of an allocation in Bitcoin.
Having said that, the starting point of the analysis is the sizing of allocations for equities, bonds, and private market assets, particularly starting from considerations on expected returns and risks.
The problem for Bitcoin is that it is extremely difficult to accurately imagine the expected returns, because it does not have underlying cash flows to make estimates. What matters is only the extent of adoption.
But on the other hand, Bitcoin has an advantage, namely that of providing a more diversified source of return.
The authors of the BlackRock report explicitly state that they see no intrinsic reason why Bitcoin should be considered correlated with other major risk assets in the long term, as its value is driven by different drivers.
Therefore, although Bitcoin cannot be compared to traditional assets, the analysts at BlackRock think that a reasonable range for exposure to Bitcoin is between 1% and 2% of the portfolio.
Exceeding 2% would significantly increase the overall risk share of the portfolio, while staying below 1% might make little sense.
In fact, they specify that, from a 60/40 portfolio construction perspective, a useful starting point is precisely the group of the “magnifici 7”. Well, these stocks represent a relatively large share of risk, exactly as in the case of Bitcoin.
However, in a traditional portfolio with a mix of 60% stocks and 40% bonds, those seven securities each represent, on average, about the same share of risk as a 1-2% allocation in Bitcoin.
Therefore, staying below 1% would not produce significant advantages in terms of risk reduction.
