Can Bitcoin Boost Portfolio Returns Without Increasing Risk? Bitwise's Matt Hougan Says It Can

Bitcoin's BTC/USD volatility is well known, but Bitwise Chief Investment Officer Matt Hougan argues that when viewed within the context of a broader portfolio, the asset may improve performance without proportionately increasing risk.

In a note published by Bitwise Asset Management on June 3, Hougan questions the conventional practice of evaluating Bitcoin in isolation.

"When you think about adding Bitcoin to a portfolio, don't do it in isolation. Think about it in the context of your entire risk budget," he wrote.

Hougan examined several hypothetical portfolio allocations from 2017 to 2024, comparing traditional 60/40 stock-bond splits with variations that include Bitcoin.

While a 5% allocation to Bitcoin significantly increased returns, from 107% to 207%, the overall portfolio volatility, measured by standard deviation, increased only modestly from 11.3% to 12.5%.

This risk-return profile, Hougan said, shows that "adding Bitcoin to portfolios has historically boosted returns without significantly increasing risk," citing Bitcoin’s low correlation to both equities and fixed income.

But Hougan proposes that a more effective method may involve adjusting other portfolio components to compensate for Bitcoin's risk.

In one model, Hougan explores a portfolio that adds 5% Bitcoin while simultaneously increasing bond exposure and tilting it toward short-duration Treasuries.

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This combination, referred to as Portfolio 3, outperformed the traditional allocation and even matched the return of the Bitcoin-enhanced portfolio, with lower risk.

The analysis goes further with a Portfolio 4, which drops equity exposure to 40%, increases bonds to 50%, and allocates 10% to Bitcoin.

This configuration delivered higher returns with less volatility than portfolios with more equity risk and less crypto exposure.

"Portfolio 3 generated higher returns than Portfolio 1 and roughly the same returns as Portfolio 2 with less risk than either," Hougan noted.

The suggestion is not prescriptive, but rather a prompt for investors to rethink how they fit Bitcoin within their broader financial strategy.

Hougan acknowledged the outsized returns of Bitcoin in earlier years may not repeat, cautioning, "Of course, there's no guarantee this will persist in the future." However, he insists that rethinking the allocation method is critical: "It makes you wonder: What if you push this further?"

The analysis is rooted in data from Bloomberg, covering a range of traditional and crypto assets from January 2017 through December 2024, and does not account for taxes or transaction fees.

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