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How even a tiny amount of bitcoin could net you massive returns

How even a tiny amount of bitcoin could net you massive returns

Much has been made about bitcoin and digital assets, particularly recently following its stellar run since Donald Trump's return to the White House. However, given its volatile performance history, what's less commonly discussed is how it fits into a traditional investment portfolio containing equities and bonds.
In the last year, bitcoin has made some significant steps forward as institutional and corporate adoption of digital assets continues. The launch of spot bitcoin ETFs in the United States improved clarity around regulation, and the take-up of adjacent use cases such as stablecoins have all given investors more confidence in digital assets.
However, while there have been some meaningful steps forward in terms of adoption, digital assets remain volatile with a penchant for becoming susceptible to hype – begging two questions, is it worth considering an allocation to bitcoin within a diversified investment portfolio? And if so, how large should that allocation be?
In short, historical data suggests that a small allocation to bitcoin has the potential to deliver meaningfully higher returns without materially increasing risk at a portfolio level.
But as that allocation increases the marginal improvement in risk-adjusted returns starts to dissipate. So, like many things in life, it's possible to have too much of a good thing, and any allocation to bitcoin should be sized accordingly.
When it comes to building an investment portfolio, the main game remains diversification across asset classes – such as Australian and international equities, bonds, cash and commodities including gold.
Adding a 2.5 per cent bitcoin allocation with quarterly rebalancing can improve the cumulative return of a portfolio to 187 per cent.
The other important consideration is time horizon and risk tolerance. For example, a person approaching retirement might have a higher allocation towards defensive assets such as fixed income compared to an accumulator investor with a longer time horizon.
In partnership with Bitwise, we looked at the simulated investment implications of adding bitcoin to a hypothetical Australian investor's portfolio with a 70/30 split to equities and bonds – that comprises a 35 per cent allocation to Australian equities, a 35 per cent allocation to international equities, and a 30 per cent allocation to Australian bonds.
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