BlackRock's latest report points out that there are both benefits and drawbacks to allocating Bitcoin, and currently recommends that investors 'underweight' it.
The world's largest asset management company states that Bitcoin can indeed find a place in a diversified asset portfolio, but it is best limited to 'a seat.'
According to a report released by BlackRock Investment Institute on Thursday, the firm recommends that investors interested in Bitcoin allocate up to 2% weight in Bitcoin within their portfolios. BlackRock believes that giving Bitcoin a weight of 1% to 2% in a standard 60/40 stock and bond portfolio would produce a risk share similar to that of the so-called 'seven major tech stocks.' The report states that this is a 'reasonable range' for Bitcoin investment, as exceeding a 2% weight would significantly increase the risk share in the overall portfolio.
For investors 'able to bear the risks of Bitcoin,' this is a potential blueprint, especially as Bitcoin soars above $100,000 and reaches new historical highs. They may wonder how to allocate Bitcoin. The elected president Trump's endorsement of the industry and his nomination of pro-crypto figures for government positions have driven the surge in Bitcoin. However, these dazzling returns come with Bitcoin's notorious extreme volatility, which is why adopting a 'risk budgeting' approach to building a portfolio makes sense.
Analysts, including BlackRock ETF and Index Investment Chief Investment Officer Samara Cohen, wrote, 'Although Bitcoin has relatively low correlation with other assets, it is more volatile, so its impact on total risk contribution is generally similar. The benefit of allocating Bitcoin is that it can provide a diversified source of risk, while an overweight in the 'seven giants' will increase existing risks and lead to portfolio concentration.'
Although Bitcoin has risen 140% this year, the road to its historical highs has been exceptionally bumpy. The report notes that since its inception in 2009, the world's largest cryptocurrency has experienced multiple pullbacks of 70% to 80%.
Factors driving the rise of cryptocurrencies this year include the launch of the U.S. spot Bitcoin ETF in January. Data compiled by foreign media shows that since its launch, the assets of these dozen or so funds have exceeded $113 billion, and investors have poured nearly $10 billion into these assets since Trump won the presidential election in November.
The report from BlackRock Investment Institute suggests that broader institutional investment in Bitcoin could dampen some of its volatility. While this may enable investors to increase their allocation size, it could also reduce the staggering returns Bitcoin has generated since its inception.
They wrote, 'Looking ahead, if Bitcoin indeed achieves widespread adoption, investing in it may become less risky. But by then, Bitcoin may no longer have structural catalysts for further significant increases.'