Bitcoin in Portfolios: A 5% Allocation's Impact on Risk and Return

Bitcoin has become a widely accepted asset class in portfolios, thanks to the launch of spot Bitcoin ETFs. These funds allow investors to gain exposure to cryptocurrency without needing separate wallets.

The iShares Bitcoin Trust and Fidelity Wise Origin Bitcoin Fund are two prominent examples, managing around $100 billion in total. This growth marks an evolution from its earlier days as a speculative, fringe asset class.

So how should investors allocate their portfolios? A 5% allocation to Bitcoin could provide meaningful exposure without significantly altering the risk/return profile. However, this decision is not straightforward.

A historical analysis of a 5% allocation to the iShares Bitcoin Trust shows that it would have contributed 7.35% of the overall risk in a portfolio with the Vanguard S&P 500 ETF.