Optimal Bitcoin Allocations

Do formal asset allocation methods specify a portfolio allocation to bitcoin (BTC)? In his September 2022 paper entitled “Optimal Allocation to Cryptocurrencies in Diversified Portfolios”, Artur Sepp applies four quantitative methods to estimate optimal allocations to bitcoin within systematically rebalanced portfolios. He considers: two risk-only methods based on either equal risk contribution or maximum diversification; and, two risk-return methods based on either maximum Sharpe ratio or maximum constant absolute risk aversion utility. For each method, he develops allocations for four portfolios:

1. 100% alternatives without BTC (consisting of HFRX Global Hedge Fund Index, SG Macro Trading Index, SG CTA Index and GLD).
2. 100% alternatives with BTC.
3. 75%/25% conventional assets/alternatives without BTC, with 75% allocation to the 60/40 stocks/bonds iShares Core Growth ETF (AOR) fund and 25% allocation to non-BTC alternatives.
4. 75%/25% conventional assets/alternatives with BTC.

He rebalances each portfolio quarterly employing the most recent five years of monthly return inputs to calculate allocations. Since the BTC series starts in July 2010, initial allocation estimates are for June 2015. Using monthly return data for all assets during July 2010 through August 2022, he finds that:

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