By answering three key questions about return expectations and target portfolio volatility, multi-asset investors can evaluate the suitability of bitcoin for their portfolios and determine their optimal allocation based on their unique objectives.
Contrary to popular belief, the price of bitcoin is primarily driven by demand, not its (mining) supply. Each of the five bitcoin bull markets has been driven by innovations in the way investors access it, ranging from the creation of early spot exchanges to the introduction of futures, unsecured lending, spot bitcoin ETFs and now options on these ETFs. This evolution underlines the growing integration of bitcoin into traditional financial markets, a trend accelerated by regulatory approvals from US agencies such as the CFTC and the SEC, which have progressively legitimized bitcoin-based financial products.
The 2017 decision to maintain Bitcoin’s 1 megabyte (MB) block size marked the resolution of a long-standing debate within the Bitcoin community over expanding the network. Originally implemented to manage congestion and maintain decentralization, the block size limit became a defining feature. By prioritizing decentralization over higher transaction throughput, this decision cemented bitcoin’s role as “digital gold.”
This framework helps traditional financial investors understand bitcoin’s role as digital gold, a risk mitigation tool or inflation hedge, and offers insight into its valuation potential. While bitcoin is unlikely to impact jewelry ($8 trillion), it could capture parts of the $10 trillion addressable market, including private investments ($4 trillion), central bank reserves ($3.1 trillion dollars) and industrial use (2.7 billion dollars). With bitcoin’s current market cap of $2 trillion, this suggests potential 5x growth as it solidifies its position as digital gold.
Table 1: Bitcoin Power Law Curves (Logarithmic Chart)
The fundamental distinction is the nature of Bitcoin as a technology with strong network effects, which gold inherently lacks. Network technologies typically follow an “S-curve” adoption model, where mass adoption accelerates once the critical 8% threshold is exceeded.
With a market capitalization of $2 trillion, bitcoin represents just 0.58% of the nearly $400 trillion global financial asset portfolio. This ratio is set to increase as asset managers, pension funds and sovereign wealth funds progressively integrate bitcoin into their investment strategies.
To strategically integrate bitcoin into a forward-thinking, Markowitz-optimized portfolio, investors must address three key questions:
- How is Bitcoin expected to perform relative to stocks?
- How will stocks perform relative to bonds?
- What is the overall volatility of the target portfolio?
These insights drive more informed allocation decisions within multi-asset portfolios.
Table 2: Optimal multi-asset allocation based on our expected risk/return parameters
For example, if bitcoin is projected to outperform US stocks by +30% in 2025, US stocks will outperform US bonds by +15%, and the portfolio targets a 12% volatility level, the following adjustments: stocks increase from 19.1% to 24.9%, real estate decreases from 16.8% to 0%, fixed income increases from 44.6% to 57.7%, and Alternatives (including private equity, hedge funds, gold and bitcoin) decline from 19.5% to 17.4%. In particular, bitcoin’s allocation increases significantly: from 0.58% (based on its current market share of the $400 trillion global financial asset pool) to 5.77%.
This adjustment increases the portfolio’s expected return from 11.3% to 14.1%, leveraging a Black-Litterman-optimized volatility-oriented framework, which is an analytical tool to optimize asset allocation within risk tolerance. and an investor’s market views. By answering these key questions and applying this approach, investors can determine their ideal bitcoin allocation.
