Bitcoin Portfolio Allocation: Rebalancing Tests and Funding Sources

Summary

This report examines how adding bitcoin affected a traditional portfolio over a five-year sample. The base allocation held equities, fixed income, and commodities and was rebalanced quarterly. The authors tested bitcoin weights from 1% to 10%, funding them from different asset sleeves or distributing the reduction across the portfolio. They compared outcomes using return, volatility, drawdown, Sharpe and Sortino measures, and correlations with a global multi-asset benchmark.

Across the tested cases, adding bitcoin improved measured risk-adjusted returns and diversification during the sample. Funding from equities produced the strongest reported combination of risk-adjusted returns, volatility, and drawdown outcomes; funding from fixed income favored higher average returns but also greater volatility. Pro-rata funding was described as a balanced alternative. These results depend on the chosen assets, rebalancing rule, and observation window, which included two crypto winters and the 2021 high but excluded the 2017 bull run. The authors caution that bitcoin’s historical relationships may not hold in the future.

Key ideas

• The study compares bitcoin allocations within a quarterly rebalanced portfolio of equities, fixed income, and commodities.
• It tests allocations from 1% to 10% and several ways of funding them from the existing asset sleeves.
• The largest marginal improvement in risk-adjusted measures occurred when moving from no bitcoin to a 1% allocation.
• In this sample, funding bitcoin from equities produced the strongest reported risk-adjusted outcomes and lower volatility and drawdowns.
• Historical diversification results do not guarantee that bitcoin’s correlations will remain stable.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.