About the author: Daniel P. Wiener is the retired founder and former chairman of RWA Wealth Advisers, a registered investment advisor in Newton, Mass. currently managing $15 billion.
Has Bitcoin earned its place in a balanced portfolio? Between a horrid few years for bonds, a 45% rebound in Bitcoin’s price in just three months, and the prospect of a Bitcoin ETF, it’s no wonder proponents are suggesting a place for the crypto in the tried-and-true 60/40 policy portfolio.
In full disclosure I am and always have been a Bitcoin skeptic. But when the mainstream began talking about Bitcoin earning a place in Mom and Dad’s retirement portfolio earlier this year, I had to investigate. And frankly, my preconceptions took a bit of a beating.
A little history. Bitcoin’s been around for over a decade, and according to pricing data from CoinDesk, the price for a single Bitcoin didn’t move beyond double digits (and much of the time was in single digits) until the spring of 2013. It then hit $1,000 for the first time late that same year. So, you can imagine there were some pretty wild days and months during its early life, like the one-month, 467% gain in November 2013, for instance, and the multiple, double-digit monthly declines that would have curled Dad’s hair, if he had any left.
Which brings me to Bitcoin and the balanced portfolio. Does Bitcoin deserve a place in the traditional 60/40, stock/bond account? My first swing at the numbers is eye-popping.
Starting in the summer of 2010, when my pricing data begins, I took the standard 60/40 portfolio and cleaved off 5% to allocate to Bitcoin, taking evenly from stocks and bonds, distributing 57.5% of the remaining assets in Vanguard’s Total Stock Market Index fund (VTSAX), and 37.5% in Vanguard’s Total Bond Market Index fund (VBTLX). Then, I rebalanced monthly. I compared that portfolio’s performance to a traditional 60/40 portfolio using the two aforementioned index funds, also rebalanced monthly.
The numbers are pretty nutty. The 5% addition of Bitcoin to the 60/40 portfolio generated a 17.9% annualized return through Sept. 2023 compared to 8.4% for the old standard, or better than twice as good. Chalk it up to Bitcoin compounding at 165% per annum.
But let’s get real. Bitcoins selling for pennies, then dollars, then hundreds of dollars while bouncing around like crazy—the early days of crypto were the Wild West.
Plus, how was anyone supposed to put Bitcoin into a balanced portfolio in those days, much less rebalance it monthly?
Also, recognize that this analysis is tainted by hindsight bias. We know today that Bitcoin has risen dramatically in price. But, if you think buying Bitcoin today is speculative, what about buying Bitcoin in 2010?
Nonetheless, the numbers are eye-popping.
Instead of relying on that old data, I thought I’d move the calendar ahead to the end of 2016 as Bitcoin began to gain some popularity before its explosive run during the Covid era. As a reminder, Bitcoin was selling for around $1,000 at the end of 2016.
Using the same comparison of the standard 60/40 against a portfolio with a 5% allocation to Bitcoin, the results are a bit tamer, though the Bitcoin value-add remained in force.
Over the period from the end of 2016 through 2023’s third quarter, the balanced-with-Bitcoin portfolio generated an 11.1% compounded return compared to 7.2% for the 60/40 standard.
What about the downside? Incredibly, the worst drawdown for the Bitcoin balanced portfolio of 22.7% was only a bit greater than the standard 60/40’s 20.7% drop.
A couple of caveats are worth considering. First, as we all know by now, this was not a great period for most traditional balanced funds because, to put it mildly, bonds were awful. While stocks compounded at a respectable 11.4% per annum, bonds were up just 0.4%. Bitcoin, on the other hand, was up an annualized 64.2%! That’s nuts, and not sustainable. I am unaware of investments (not speculations) that reliably compound at 60-plus percent. This was an incredible period for Bitcoin, which soared from $1,000 to almost $30,000, though it should be said the cryptocurrency traded over $67,000 in late 2021.
Also, I’m using raw Bitcoin pricing data. I’d be shocked if anyone could have replicated this without a ton of friction in the trading. Proposed Bitcoin ETFs backed by “physical Bitcoin” (a misnomer if there ever was one) may solve part of that issue. But compared to indexed funds and ETFs they won’t be particularly cheap, and I suspect there’ll be plenty of pricing friction for Bitcoin-ETF traders to contend with.
So, does six-and-three-quarters years of data convince me that Bitcoin belongs in a balanced portfolio? Hardly.
Today, bonds finally sport yields, stocks of growing companies continue to compound value for shareholders, and Bitcoin remains a total speculation. As a tech-savvy buddy of mine who’s owned crypto in the past says, Bitcoin’s “use case” seems to be relegated to porn, illicit arms, and drugs.
Should the proposed new ETFs become reality, I think they will see an initial flurry of interest before the shine comes off the Bitcoin mystique. And the era of 60% annualized returns will become a historical footnote.
Bitcoin for Mom and Dad’s 60/40? I’m not buying it.
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