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Institutions are increasingly allocating to digital assets, but their role in a portfolio is not yet well defined or studied. This piece focuses on bitcoin and reviews its relationship with major asset classes in the context of an institutional caliber portfolio. Standard techniques are used to help advisors better understand position sizing and the associated risk/reward tradeoff.

This year has started off well for bitcoin. Having breached a new all time high of $61,788.45 on March 13, each passing month brings with it a new milestone, new players, and greater acceptance. Recently, significant news has focused on the pace of institutional adoption. In fact, in a survey of 800 institutional clients, investment giant Fidelity reported that a full 36% of clients across the U.S. and Europe were investing in digital assets and 60% reported having interest in adding digital assets to their portfolios. Looking out five years, 91% of respondents expect to have at least 0.5% of their portfolio allocated to digital assets with bitcoin, presumably, representing a substantial share of this newly allocated capital.

Institutional adoption has always been recognized as a major hurdle for bitcoin and while progress has certainly been made, obstacles remain. Amongst those cited by participants in the Fidelity survey: price volatility, possible market manipulation, lack of accepted fundamentals and no established investing framework were cited as areas of concern.

Bitcoin still vexes most investors and surveys like Fidelity’s confirm this view. Part of the confusion is technological. Bitcoin (and crypto more generally) represents a paradigm shift in the structure of financial markets that investors will naturally have to learn and become comfortable with. Another reason, which will be the focus of this piece, is educational. While the space has developed and matured considerably from the heady days of 2017, investors have not kept pace. Investment frameworks and valuation criteria remain, by and large, inadequate. No pension fund manager is going to run the risk of defending a crypto allocation to their board without the empirical firepower to back it up.

In this article and several more to come, my objective is to present an asset allocator’s view of bitcoin. We’ll begin by focusing on the statistical properties of bitcoin and the state of its relationship with other major asset classes. We’ll then transition into portfolio construction and risk management where we’ll use standard techniques to measure how the inclusion of bitcoin in a portfolio can impact risk, return, and expected outcomes.