BitcoinBusiness

Fidelity Report Finds Small Bitcoin Allocation Boosts Traditional Portfolios

According to a report published by Fidelity Digital Assets, investment portfolios with a low single-digit percentage allocation to Bitcoin would have seen notably increased annual returns in the past five years.

The report analyzed how Bitcoin could have benefited a 60/40 portfolio consisting of stocks and bonds, with bonds representing the majority. The data could compel institutions to consider allocating a minor portion of their portfolios to Bitcoin, a trend underlined by recent institutional moves into Bitcoin.

How Bitcoin allocation into a stocks and bond portfolio changed returns in the last 5 years. Source: Fidelity Digital Assets

Square, Stone Ridge, and MicroStrategy are the Most Recent Institutions to Invest in Bitcoin

Bitcoin is still in an early phase of growth relative to the market caps of other traditional safe-haven assets such as gold. As such, Bitcoin has significant growth potential, which appeals to institutional investors of size.

In the past two months, three multi-billion dollar corporations have publicly announced investments in Bitcoin. Following MicroStrategy's $425 million and Square’s and $50 million allocations, asset manager Stone Ridge revealed that it had bought $115 million worth of bitcoin.

Apart from Bitcoin’s characteristics as a store of value, allowing bitcoin to naturally serve as a hedge against inflation, the gap in the valuation between Bitcoin and gold makes it an attractive long-term investment.

In the past, when there was a shortage of institution-tailored exchanges and custodial services, it was difficult for major conglomerates to directly purchase bitcoin. Now, there are well-regulated exchanges, over-the-counter (OTC) service providers, custodians, and a compelling allocation strategy for institutional investors.

The Ideal Strategy for Institutions

The preferable strategy to allocate capital to Bitcoin is  that of hedging against inflation and speculating on an alternative store of value. Hence, if Bitcoin can serve both as a hedge and as an asset that provides substantial value growth over time, it becomes increasingly attractive for institutions.

Fidelity Digital Asset’s findings, which show how a small investment in Bitcoin can boost traditional stocks and bond portfolios, presents a highly optimistic statistic for institutions. Dan Tapiero, co-founder of 10T Holdings, commented on the numbers:

Huge performance gains with only a small #Bitcoin position. Fidelity Digital Assets report by Ria Bhutoria is mandatory reading for all institutional asset allocaters. Only 3% BTC position in past 5yrs would have increased performance of a 60/40 portfolio from 6.8% to 10.2%!

Since August, daily trading volume at institution-focused platforms such as Bakkt has remained high. The confluence of the trend of institutions allocating a portion of their capital to Bitcoin and stable volume on institutional platform indicates an overall increase in institutional demand.

written by

Joseph Young is a financial analyst based in South Korea. He has covered Bitcoin and the crypto market since 2013. He regularly contributes to the BTC Times, Forbes, and Cointelegraph.