Bitcoin’s volatility is often the reason why traditional investors hesitate to include it in their long-term portfolio strategies. However, Matt Hougan, chief investment officer of Bitwise Asset Management, believes that Bitcoin’s inclusion does not necessarily mean embracing higher risks.
Instead, Hougan suggests how asset positioning in traditional portfolios can provide stronger performance while maintaining or even reducing overall volatility.
Risk exposure of alternative allocation and adjustment
In a recent notes to clients, Hougan revisits common ways to integrate Bitcoin into a 60/40 stock bond portfolio. The standard model involves redistribution of small amounts (usually 1% to 5%) from stocks and bonds.
Historically, this strategy has produced higher returns only at the edge of portfolio volatility, thanks in part to the low correlation of BTC with stocks and fixed income assets.
However, Hougan now proposes a more nuanced approach that argues that greater changes in asset weighting are to manage risk more intentionally.
Rather than simply reducing stocks and bonds to make room, Hogan explores alternative allocation models that actively rebalance risks throughout the portfolio.
Such a model suggests increasing exposure to Bitcoin, while increasing bond allocations, and transferring bond holdings to short-term treasury bills to further reduce duration risk.
He explained that this approach could better align with the way risk-sensitive investors behave in practice, thereby adjusting a portion of the portfolio to offset increased exposure elsewhere.
From January 1, 2017 to December 31, 2024, when applied to historical data, BTC and bond weighted increase in portfolios have a 5% increase in return for BTC and bond weighted increase compared to traditional portfolios that do not include Bitcoin at all.
Hougan also proposed a version that allocates 10% to Bitcoin, 50% of bonds, and reduces equity exposure to 40%. The portfolio showed the highest returns in these four examples, while only lower than the standard 60/40 allocation, with only Bitcoin exposed 5%.
A broader view of the role of Bitcoin in portfolio construction
Hougan’s analysis is based on a core observation: BTC’s historically low correlation with traditional asset classes makes it a potentially valuable addition to consideration in the broader portfolio structure.
Rather than treating it as an independent bet, he encourages investors to consider “risk budgets” and consider how other components of the portfolio, such as duration risk or equity, can be modified to adapt to BTC more balancedly.
Although past performance does not guarantee future returns, these findings add to increasing research, suggesting that digital assets can enhance traditional investment strategies under the right conditions.
As Bitcoin continues to gain regulatory and institutional recognition, its growing role in diversified portfolios remains a topic of active exploration.
For investors and advisors trying to understand how digital assets adapt to long-term financial plans, the focus may shift from whether to include Bitcoin to the most effective practice.
Feature images created with DALL-E, TradingView’s chart
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