19.4% Bitcoin portfolio allocation ideal for risk-adjusted returns: ARK Invest

A 2023 report by ARK Invest highlights the outperformance of Bitcoin compared to other major assets and suggests a potential allocation of up to 19.4% in institutional portfolios to maximize risk-adjusted returns.

The investment management firm recently published its annual report on January 31st, which features various research findings focused on the convergence of blockchain technology, artificial intelligence, energy storage, and robotics.

A significant portion of the report delves into Bitcoin portfolio allocation and its performance since its inception, as well as a closer look at its metrics over the past three years.

Bitcoin’s Long-Term Performance

ARK’s research reveals Bitcoin’s outstanding performance compared to other major traditional investments over extended periods. In the past seven years, Bitcoin has averaged a 44% annual return, while other assets have only averaged 5.7%.

The analysts point out that investors who hold Bitcoin for a long-term horizon have reaped significant benefits. They also acknowledge that Bitcoin’s volatility can obscure its long-term returns due to short-term market fluctuations:

“Instead of asking ‘when,’ the more important question is ‘for how long?’ Historical data shows that investors who held Bitcoin for at least five years have profited, regardless of when they bought.”

ARK’s research delves into the volatility and return profiles of traditional assets and suggests that a portfolio aiming for optimized risk-adjusted returns would have allocated 19.4% to Bitcoin in 2023.

This allocation has significantly increased over the past decade. According to ARK, on a 5-year rolling basis, an optimal allocation to Bitcoin would have maximized risk-adjusted returns since 2015:

“Based on our analysis, in 2015, the optimal allocation for maximizing risk-adjusted returns over a 5-year period would have been 0.5%. Since then, the average allocation to Bitcoin has been 4.8%, and in 2023 alone, it would have been 19.4%.”

Could Bitcoin Reach $2.3 Million?

According to ARK’s research, a hypothetical scenario where institutional investors from the $250 trillion global asset pool follow a 19.4% Bitcoin portfolio allocation could result in a staggering price of $2.3 million per BTC.

If just 1% of the global asset pool invested in Bitcoin, its price could reach $120,000. And if the average maximum Sharpe ratio from 2015 to 2023 was allocated, the price could reach $550,000. However, following ARK’s recommended 19.4% allocation, the price of Bitcoin would skyrocket to $2.3 million per coin.

The Evolution of Bitcoin Investment Strategies

Through extensive market analysis, ARK has determined that a 19.4% allocation to Bitcoin is the optimal choice for maximizing risk-adjusted returns. This percentage differs from previous recommendations by other investment experts.

In January 2022, billionaire Ray Dalio and investor Bill Miller both agreed that a 1-2% portfolio allocation to Bitcoin was ideal. A year prior, JPMorgan’s investment strategists also suggested a 1% allocation to Bitcoin as a hedge against traditional asset class fluctuations.

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