A recent analysis by Citi found that a small allocation of Bitcoin in a traditional 60/40 portfolio (60% stocks and 40% bonds) can significantly boost returns.
The study, based on a 1-year analysis dating back to 2014, found that a U.S. portfolio allocated 60% to stocks and 40% to bonds would produce a return of 6.5%. However, adding 1% to BTC increases the return to 7.42%.
Citi analyst Alex Saunders stated in his report that when 5% of the portfolio is allocated to BTC, the return can rise up to 9.3%. “Historically speaking, a spend on Bitcoin will increase portfolio returns,” Saunders said.
For a 5% Bitcoin allocation to a 60/40 portfolio to be reasonable, BTC needs to return between 12% and 16% annually. A smaller 1% stake requires an annual return of 8% to 10%.
However, Saunders also highlighted the risks associated with adding BTC to an otherwise balanced portfolio. According to the analyst, Bitcoin's correlation with other asset classes has increased over time, and the asset tends to rise when the US dollar weakens. Moreover, tough periods for stocks tend to coincide with falling returns for BTC.
“Cryptocurrencies also tend to deliver lower returns during the worst equity months,” Saunders said.
*This is not investment advice.