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Bitcoin Boosts Returns and Dampens Volatility in Traditional Portfolios

Bitcoin's price gains are among the best documented facts in modern finance. Over the past 10 years, Bitcoin has compounded at an average annualized rate of 60%, returning 119% over the single year through July 2024 and leading every major asset class. Less well known, and more important, is that Bitcoin's worst four-year compounded annualized return across its entire 15-year history is 22.9%. That figure is multiples greater than the four-year annualized return of any other major liquid asset. Bitcoin is not just a return leader. It is a consistent one.

What remains genuinely misunderstood is Bitcoin's volatility: how it is measured, what drives it, and what that means for a multi-asset portfolio. Concerns about volatility are the most common reason advisors and institutions have avoided Bitcoin allocations. This report presents the empirical case that those concerns rest on a misreading of what Bitcoin's volatility actually represents.

The key finding: a 3% Bitcoin allocation, rebalanced quarterly into an otherwise traditional 60/40 portfolio, improved both absolute and risk-adjusted returns over the five-year period from December 2017 through December 2022 (including two Bitcoin drawdowns exceeding 70%), and improved them further over the extended period through March 2024. It accomplished this while reducing downside volatility relative to the traditional 60/40. More return. Less bad risk. Both at once.

Bitcoin is not Crypto

This distinction matters for every portfolio discussion that follows. Bitcoin's market capitalization of $1.3 trillion represented 57% of the entire digital asset market's total capitalization of $2.2 trillion across tens of thousands of other tokens and coins. No other asset class has a single component representing more than 25%, let alone more than 50%, of total capitalization. Bitcoin has maintained market dominance over every other digital asset since its launch in January 2009. This sustained dominance is one reason Onramp characterizes Bitcoin as the benchmark: the Alpha is in the Beta when choosing digital assets, because Bitcoin alone consistently delivers superior returns without requiring exposure to the counterparty risks and speculation that characterize alternative digital assets.

Bitcoin's 19.7 million tokens in circulation will increase at an annual rate of just 0.8% through 2028, with that rate cut in half every four years until 2140. Total supply will increase by only 6% from today through the final coin issuance in 2140, adding just 1.3 million tokens. This codified scarcity stands in stark contrast to the 50% increase in U.S. debt since January 2020, and the 6.9% average annual growth in M2 since 1971, accelerating to 8.4% since Q1 2020. Gold supply expands approximately 2% annually. Bitcoin cannot be similarly inflated: when Bitcoin's price rises, code prevents any increase in the pace or total of supply.

Misunderstanding Volatility: Good Vol and Bad Vol

The fundamental insight of this report is that Bitcoin's volatility is qualitatively different from the volatility of traditional assets, and treating it as equivalent produces an incorrect risk assessment. Just as cholesterol consists of two forms with opposite health effects, volatility consists of good volatility (driven by outsized positive returns) and bad volatility (driven by losses). The standard deviation formula, the most common measure of volatility, does not distinguish between them. This creates a uniquely misleading result for Bitcoin, because the majority of Bitcoin's volatility is good volatility.

Traders describe most assets as riding an escalator up and an elevator shaft down: prices grind higher slowly and crash rapidly. This pattern produces the negative skew that characterizes most equities and bonds, where outlier negative returns pull the mean left of the median and mode. Bitcoin's distribution runs the other direction. Its positive skew of +1.6 (versus gold's +0.2) means the mean return is pulled to the right of the mode. There are over 71 instances of returns exceeding 100% in Bitcoin's rolling 3-month return distribution, compared to just 12 instances of worst-case losses between 45% and 60%. The upside tail is substantially longer than the downside tail.

The Data on Good Vol vs. Bad Vol

Based on 20 quarters of data in the December 2017 to December 2022 study period, Bitcoin's Good Vol (upside deviation) of 137.0% is more than three times its Bad Vol (downside deviation) of 39.9%. For traditional assets, the opposite relationship holds: downside deviation exceeds upside deviation, meaning volatility and the probability of loss are genuinely correlated. For Bitcoin, they are not. Standard deviation captures both and produces a number that overstates the risk of loss while understating the potential for gain.

The practical implication is that the standard approach to evaluating Bitcoin's riskiness, comparing its standard deviation to that of the S&P 500 or bond aggregate, is methodologically inappropriate. It penalizes Bitcoin for volatility that is not loss. The Sortino ratio, which divides returns by downside deviation only, is a more appropriate measure for assets with positive skew, and it produces a more favorable picture of Bitcoin's risk-adjusted performance.

Bitcoin vs. the NASDAQ: Not a Leveraged Proxy

A persistent misconception in institutional circles holds that Bitcoin is effectively a 3x leveraged play on the NASDAQ. This claim is not supported by the data, and the directional comparison of rolling 3-month returns disproves it.

Over the five years preceding the study, Bitcoin's average outperformance of the NASDAQ over rolling 63-day periods was 40.2%, while its average underperformance was just -18.4%, yielding a ratio of 2.2. Bitcoin delivered this positive asymmetry in 55% of measured instances (days), underperforming in 45%. A truly leveraged proxy of the NASDAQ would deliver comparable underperformance to its outperformance, with a similar frequency. Bitcoin does not.

Bitcoin's rolling 3-month correlation to the NASDAQ over 1-year, 3-year, 5-year, and 10-year periods has been 20%, 43%, 37%, and 21% respectively. These figures are positive but far from the high correlation implied by the leveraged proxy narrative. Bitcoin has posted brief periods of rolling 63-day correlations above 70%, but these are episodic rather than structural. The correct framing is that Bitcoin's distinct return distribution makes it a genuine diversifier for traditional assets, not a leveraged approximation of any of them.

"Bitcoin's average outperformance of the NASDAQ over rolling 63-day periods was 2.2x its average underperformance, and it delivered this positive asymmetry more than half the time. A 3x leveraged index proxy would produce the opposite profile."

The BTC-Enhanced 60/40 Portfolio: Empirical Results

The study examines two periods. The primary study period runs from December 2017 through December 2022, encompassing 20 consecutive quarters and two Bitcoin drawdowns exceeding 70%, leaving Bitcoin up just 17.8% at period end. The extended period adds five more quarters through March 2024, during which Bitcoin appreciated 404%.

The portfolio structure is straightforward. The traditional 60/40 portfolio holds 60% Bloomberg U.S. Large Cap Equity Index and 40% Bloomberg U.S. Bond Aggregate (unhedged). The BTC-enhanced portfolio reduces those allocations to 58.5% and 38.5% respectively and adds 3% Bitcoin, rebalanced quarterly back to these weights.

Primary Study Period Results (December 2017 to December 2022)

Despite two Bitcoin drawdowns of more than 70%, the BTC-enhanced portfolio improved performance meaningfully across every material dimension.

• Average annual total return: 7.8% for the BTC-enhanced portfolio vs. 5.9% for the traditional 60/40, an improvement of 190 basis points.

• Downside volatility: 7.9% for the BTC-enhanced portfolio vs. 8.2% for the traditional 60/40 and 14.8% for U.S. Large Cap Equity alone. The BTC-enhanced portfolio had less bad volatility despite including a high-volatility asset.

• Maximum drawdown: -21.4% for the BTC-enhanced portfolio vs. -20.8% for the traditional 60/40, a nearly identical risk profile at the worst point.

• Sortino ratio: improved relative to the traditional 60/40, reflecting the higher risk-adjusted return per unit of downside risk.

Extended Study Period Results (December 2017 to March 2024)

The additional five quarters, during which Bitcoin recovered and appreciated sharply, further illustrate the rebalancing benefit and the persistence of Bitcoin's asymmetry.

• Average annual total return: 11.1% for the BTC-enhanced portfolio vs. 8.6% for the traditional 60/40, a 250 basis point improvement.

• Downside volatility: 7.8% for the BTC-enhanced portfolio vs. 8.0% for the traditional 60/40. Once again, lower bad volatility despite containing Bitcoin.

• Sortino ratio: improved from 0.7 to 1.0 for the BTC-enhanced portfolio, while the traditional 60/40 improved from 0.5 to 0.7. The BTC-enhanced portfolio maintained a higher ratio at both points.

• Alpha: the 3% BTC allocation generated 0.8% alpha relative to the S&P 500, improving on the -0.6% alpha produced by the traditional 60/40 by 140 basis points.

Harvesting Good Volatility Through Rebalancing

The performance improvement delivered by the 3% Bitcoin allocation is not simply a function of holding Bitcoin. It depends critically on quarterly rebalancing. The mechanism is analogous to volatility harvesting, a technique typically associated with expensive options strategies.

In the primary five-year study period, a static 3% Bitcoin allocation would have contributed just 0.5% to overall portfolio performance (17.8% BTC return multiplied by 3% weight). But by rebalancing quarterly, buying Bitcoin after it fell and trimming it after it rose, the contribution increased to 8.8%, or over 16 times the contribution of a static allocation. The rebalancing process systematically harvests Bitcoin's positively skewed return distribution, capturing gains when Bitcoin runs and adding exposure at lower prices when it corrects. This process requires no leverage, no options, and no derivatives. It requires only discipline and a quarterly rebalancing schedule.

The Quarterly Asymmetry in Practice

Bitcoin's contribution to portfolio performance was positive in up quarters and negative in down quarters, but the ratio was highly favorable. In up quarters, Bitcoin contributed an average of 1.7% to portfolio returns. In down quarters, it detracted just -0.8%, yielding a contribution ratio of 2.1. Compare this to U.S. Bonds, which contributed 0.6% in up quarters and detracted -1.3% in down quarters (a ratio of 0.4), and U.S. Large Cap Equity, which contributed 4.8% in up quarters and detracted -5.9% in down quarters (a ratio of 0.8). Only Bitcoin delivered contribution ratios greater than 1.0, adding more in up quarters than it subtracted in down quarters by a margin that no traditional asset in the study replicated.

"Bitcoin contributed 1.7% to portfolio returns in up quarters and detracted just -0.8% in down quarters, a ratio of 2.1. No other asset in our study came close to this contribution asymmetry. It is a mathematical expression of Bitcoin's positive skew."

The Alpha is in the Beta

Bitcoin is the benchmark of the digital asset marketplace, not one asset among many. Its 15-year track record of maintaining over 50% of total digital asset market capitalization makes it the market, the beta. The fact that it also generates alpha within a traditional portfolio when included at a modest 3% allocation makes it uniquely valuable: it is simultaneously the benchmark and the source of excess return.

A 3% rebalanced allocation of Bitcoin to an otherwise traditional 60/40 portfolio generates 0.8% of alpha relative to the S&P 500. The traditional 60/40 produces -0.6% alpha relative to the same benchmark. Bitcoin's inclusion converts a negative-alpha portfolio into a positive-alpha one. The BTC-enhanced portfolio also posts a lower correlation to traditional assets than the traditional 60/40, further reinforcing Bitcoin's diversification value. Its beta to traditional assets remains modest, even as it delivers alpha, confirming that the return improvement is not simply a function of added correlation to existing risk factors.

The Conclusion: More Return, Less Bad Risk

The empirical data from this study, covering a period that includes two Bitcoin bear markets with drawdowns exceeding 70%, sustained periods of U.S. Treasury volatility, a Federal Reserve rate hike campaign, and multiple regional bank failures, supports a single conclusion: Bitcoin improves portfolio outcomes when held at a modest allocation and rebalanced regularly.

The improvement comes specifically from Bitcoin's positive skew: its return distribution is biased toward outsized gains rather than outsized losses, and regular rebalancing harvests that asymmetry in a way that a static allocation cannot. The volatility that concerns most advisors is primarily good volatility, upside deviation that the standard deviation formula conflates with loss risk. The better measure, downside deviation, shows that the BTC-enhanced portfolio actually carries less bad volatility than the traditional 60/40 it is benchmarked against.

For advisors and institutions tasked with improving absolute returns and risk-adjusted returns while managing drawdown risk, the evidence supports a 1% to 3% Bitcoin allocation with quarterly rebalancing as a straightforward mechanism for achieving all three simultaneously. The future of portfolio finance includes Bitcoin as a core input. The data makes that case without ambiguity.

To learn how Onramp supports advisors and institutions building Bitcoin allocations with institutional-grade custody and portfolio management, contact the Onramp team.

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