Cathie Wood’s ARK Invest, known for its bullish stance on disruptive technologies, sparked controversy with its latest report suggesting a nearly 20% allocation to Bitcoin (BTC) for optimal portfolio diversification. This proposal, which is significantly higher than in previous years, raises questions about Bitcoin’s hedging potential and the validity of such a large allocation. Here are the details…
How much should Bitcoin be included in portfolios?
The report highlights Bitcoin’s outperformance against traditional assets over the past seven years. Resulting in a proposed 19.4% allocation for 2023. This would maximize risk-adjusted returns, with the optimal allocation increasing steadily from 0.5% in 2015, according to ARK. 6.2% in 2022. ARK highlights Bitcoin’s unique value proposition: not just an investment option, but also a significant diversifier that offers “unprecedented growth potential.” They point to its low five-year correlation (0.27) with traditional assets and suggest that it may act as a hedge against market downturns.
Additionally, the report argues that, given the large global investable asset base, even small allocations from institutional investors could significantly impact Bitcoin’s price. This optimistic outlook is consistent with Bitcoin’s recent performance, rising 77.8% over the past year and attracting institutional interest, as evidenced by large wallet inflows and increased CME futures activity. However, a potential bearish signal from the Guppy indicator is raising concerns.
Performance against other assets
ARK provides data reflecting Bitcoin’s outperformance over longer time frames against other major traditional investment assets. Over the past seven years, Bitcoin’s annual return has averaged 44%, while other major assets have averaged 5.7%. Analysts note that Bitcoin investors with “long-term time horizons” benefit from holding the asset for long periods of time. The report suggests that Bitcoin’s historical volatility may obscure long-term returns due to short-term increases and decreases in value.
ARK’s research evaluates a wealth of observed market data arriving at a 19.4% Bitcoin allocation to maximize risk-adjusted returns. In previous years, its projected allocation was more in line with other leading investment analysts and experts. In January 2022, Ray Dalio echoed billionaire investor Bill Miller’s sentiments that a 1 percent to 2 percent portfolio allocation to Bitcoin was an optimal number. A year ago, investment strategists at JPMorgan suggested that a 1 percent portfolio allocation to Bitcoin would serve as a hedge against volatility in traditional asset classes such as stocks, bonds and commodities.
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