The world's largest asset management company stated that Bitcoin can indeed find a place in a diversified asset portfolio, but it is best limited to 'one seat.'
According to a report released by BlackRock Investment Institute on Thursday, the bank recommends that investors interested in Bitcoin allocate up to 2% of Bitcoin weight in their portfolios. BlackRock believes that giving Bitcoin a weight of 1% to 2% in a standard 60/40 stock and bond portfolio will result in a risk contribution 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 contribution of the entire portfolio.
For investors 'able to bear Bitcoin risk,' 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 endorsement of the industry by then-President Trump, along with his nomination of pro-cryptocurrency individuals to key government positions, propelled the rise of Bitcoin. However, these dazzling returns come with Bitcoin's notorious volatility, which is why adopting a 'risk budgeting' approach to constructing a portfolio makes sense.
Analysts, including Samara Cohen, Chief Investment Officer of BlackRock ETF and Index Investments, wrote, 'Although Bitcoin has relatively low correlation with other assets, its higher volatility means its overall impact on total risk contribution is similar. The benefit of allocating Bitcoin is that it can provide a diversified source of risk, whereas over-allocating to the 'seven giants' would increase existing risks and lead to portfolio concentration.'
Although Bitcoin has risen 140% this year, the path to its historical high has been exceptionally bumpy. The report notes that since its inception in 2009, the largest cryptocurrency in the world has experienced retracements of 70% to 80% multiple times.
Factors driving cryptocurrency up this year include the launch of the U.S. spot Bitcoin ETF in January. Data compiled by foreign media shows that since its launch, these several funds have amassed over $113 billion in assets, and investors have poured nearly $10 billion into these assets since Trump's victory in the presidential election in November.
The report from BlackRock Investment Institute believes that broader institutional investment in Bitcoin may dampen some of its volatility. While this may enable investors to increase their allocation size, it may also reduce the astonishing returns of Bitcoin since its inception.
They wrote, 'Looking ahead, if Bitcoin does achieve widespread adoption, investing in it may become less risky, but by then, Bitcoin may no longer have structural catalysts for further significant increases.'
Article reposted from: Jin Shi Data
