As cryptocurrencies, particularly Bitcoin, continue to capture headlines, wealth managers are increasingly being approached to comment on their role in portfolios. The global cryptocurrency market capitalisation has grown to over US$2.8 Trillion today, with Bitcoin (BTC) making up over half of that, as the dominant digital currency. This raises the question of how to assess this relatively new asset class in the context of a diversified multi-asset class portfolio. In this article, we explore the role of Bitcoin, its risks and how it compares to traditional asset classes like equities, bonds, and gold as a store of value.
What is a Cryptocurrency?
Cryptocurrencies are a type of digital currency that allows people to make payments directly to each other through an online system that is not reliant on any central authority such as a government or bank, to uphold it. They are secured by cryptography, and the record of transactions is permanently stored in what is called a blockchain, which is a distributed ledger shared across a computer network’s nodes.
Cryptocurrencies play a key role in maintaining a secure and decentralised finance system (DeFi) that allows users to directly transact with each other without relying on traditional intermediaries like banks. The aim is to provide greater accessibility and transparency by removing third parties from financial transactions.
Why Bitcoin Over Other Digital Currencies?
Bitcoin is the first, largest and most liquid cryptocurrency by market capitalisation. Its fixed supply of 21 million coins and scheduled halving events every four years create scarcity, positioning it as a potential store of value—unlike fiat currencies that can be devalued through money printing.
Bitcoin also has the largest user base and development ecosystem with more software and implementations than any other altcoin. Using a more secure consensus mechanism, it is mined using computers to solve complex mathematical puzzles and is how new coins are launched into circulation. Widely recognised as the most adopted cryptocurrency, Bitcoin’s high liquidity has made it a popular choice for crypto beginners looking to gain exposure to the asset class.
Portfolio Construction: The Key Consideration
The most important question for any investment decision is: How does this asset contribute to achieving the portfolio’s objectives? Each portfolio has a unique objective, and all investments must be analysed and evaluated in the context of the role it plays, rather than in isolation.
- Does Bitcoin Align with the Portfolio’s Goals?
- If a client’s primary goal is generating stable income in retirement, is a highly volatile asset such as Bitcoin appropriate? If so, what would be the correct position sizing to ensure it doesn’t introduce excessive risk?
- How Would a Major Drawdown Impact the Portfolio?
- Bitcoin’s history of large drawdowns—such as its 69% decline from November 2021 to mid-2022—raises critical questions. If a similar downturn occurred, would it materially impact the client’s ability to meet their financial objectives? Again, it is important to consider the size of the position, relative to the portfolio.
- Do I Need an Asset Capable of 100% Annual Gains?
- Bitcoin’s upside potential is often highlighted, but does the portfolio require such extreme returns to meet its objectives? If the financial plan is already well-structured, then speculative assets should be a complementary piece rather than a core holding.
Ultimately, every asset must be evaluated through the lens of how it helps or hinders the portfolio’s ability to achieve long-term goals, and likewise applies to a digital currency like Bitcoin.
How Could Bitcoin Play a Role in a Multi-Asset Class Portfolio?
We consider how Bitcoin could play a role in a Multi-Asset Class Portfolio and share some of the analytical approaches utilised:
Potential Source of Diversification:
Bitcoin does not fall into any of the traditional asset classes of equities, bonds, private market assets or commodities. Instead, it can be considered a new classification of digital asset that better fits under the alternatives category within a diversified portfolio. True alternative assets are not correlated with traditional asset classes and tend to have a larger residual return, which means their return cannot be explained by a traditional factor regression model and there is an element of ‘alpha’. Bitcoin’s low explanatory power in such models makes it a potential source of diversification.
A factor regression model is a statistical tool that helps you understand what influences the performance of an investment, like a stock. It helps to isolate how market forces like interest rates, inflation, or equity risk explain an asset’s return. These factors represent things that affect the investment’s performance, and a factor regression model looks at how much each factor affects the final result. This model helps us understand the degree to which various factors like interest rates, momentum, credit, and equity contribute to an investment’s risk and return. A residual return is the component that cannot be explained by these known factors and is an unexpected bonus.
Low Positive Correlation to Other Asset Classes:
Quickly earning the title of ‘Digital Gold’ for the fact that it is a potential store of value, Bitcoin has a history of robust performance and has been the best-performing asset class for eight out of the past eleven years. It has returned an annual growth rate of 162% in USD since inception to March 2025, but not without a maximum drawdown of 92.3% which would make even the most seasoned investors uneasy. When compared to other asset classes including equities, commodities, bonds, property, and infrastructure and even hedge funds, it demonstrates very low positive correlation (Chart 1).
Correlation is a way to measure how two things are related, and when they move in the same direction, to the same magnitude, they would have a correlation of one. A correlation of zero means they do not affect each other at all, while a -1 figure means they are perfectly negatively correlated (as one goes up, the other goes down). Chart 1 shows how Bitcoin’s correlation to other asset classes (in the first column) is quite close to zero, which means it is not closely related to their performance.
Chart 1 – Correlation Matrix
Source: Lipman Burgon and Partners
A Small Allocation Can Improve Risk-Adjusted Returns:
Accordingly, Bitcoin does present some strong portfolio diversification benefits with potentially high returns.
The Sharpe ratio is a useful metric to consider as it shows how much additional return you are earning for the level of risk taken (the higher the better).
Historically, Bitcoin’s Sharpe ratio is 1.49 and based on our analysis1, adding only a 1% allocation to an LBP Model Portfolio will improve the forecasted annual Sharpe ratio by 6.25% while adding another 60 basis points of return for only 10 basis point of additional volatility. It will also increase the residual return due to its uncorrelated nature so this quantitative analysis demonstrates that a small allocation can optimise portfolio outcomes. An asset displaying this level of volatility though (90%), can quickly erode portfolio outcomes particularly during a crypto bear market, therefore position sizing for the portfolio’s accepted risk limits is crucial.
Qualitative factors can be examined when considering Bitcoin in a portfolio, including how its decentralised nature makes it less price sensitive to geopolitical events or economic policies that may lead to fiat currency devaluation. Bitcoin’s fixed supply means it is not subject to the same inflationary pressures caused by printing money. On the other hand, this highly speculative asset can rally on the back of Trump’s tweets and no real change to fundamentals, which leads to the next point of valuation.
Potential Store of Value:
Most traditional assets are valued via their cash flows through a discounted cash flow analysis. Bitcoin and other cryptocurrencies do not generate cash flows, which means it can be difficult to determine a true ‘intrinsic value’ for them. Approaches to valuing them are based on scarcity, their network and production costs, similar to gold.
Comparing Bitcoin to the US Dollar is also helpful because if policymakers are effectively managing the existing monetary regime (elevated real interest rates with constrained money supply growth), investors are less likely to look for an alternative. So, the last 15 years of low and negative interest rates and rapid growth in money supply presented ideal conditions for Bitcoin and fuelled the crypto boom. Under tighter macroeconomic conditions though, it may be considered less valuable. This is in line with the factor regression model that highlighted strong positive factor exposure to interest rates and foreign currency.
In determining the role of Bitcoin in portfolios, one could also consider it as a possible store of value, though this value is determined by its users, supply and demand, which can be subject to high levels of volatility.
Overall, Bitcoin may be suited to playing a speculative, diversifying role in multi-asset class portfolios and position sizing is crucial to mitigate downside risks.
Equity Risk Premium vs. Uncertain Crypto Premium
When constructing a portfolio and forecasting returns, one often turns to determining the risk premia you can expect of certain asset classes.
Risk premia is the extra return investors expect to earn for taking on more risk (riskier investments like stocks should offer higher returns than safer ones like government bonds).
One of the core advantages of equities in portfolio construction is the consistency of the equity risk premium over the long term. Decades of historical evidence show that, despite short-term volatility, equities have reliably delivered superior returns compared to lower-risk assets like bonds and cash. This return premium, known as the equity risk premium, has allowed investors to build wealth and meet long-term financial goals with a high degree of predictability.
This consistency enables wealth managers to project long-term equity returns with reasonable confidence, making portfolio construction and financial planning more predictable. The ability to rely on equities delivering a return premium over risk-free assets like cash means investors can build strategies that account for different market conditions and life stages with a high level of certainty.
There is very little knowledge about the existence of risk premia in the cryptocurrency market as most market participants find it difficult to predict their returns. Although there is some evidence that Bitcoin does have a high risk premium due to its perceived risk, the asset class does not have a long enough track record to provide any kind of forecasting predictability that can inform portfolio decisions the way equities do. This introduces greater uncertainty when incorporating Bitcoin into a long-term portfolio, leaving investors with more unknowns that increases portfolio construction complexity.
Investor Behaviour
For wealth managers, the behavioural tendencies of investors are one of the most critical determinants of long-term portfolio success, as they can have very different responses compared to institutional investors. A significant drawdown in an asset like Bitcoin, particularly if the position is too concentrated, can lead to emotional decision-making and panic selling.
Studies consistently highlight the role of investor behaviour in determining returns. For instance, Morningstar (2023) found that the “behavioural gap”—the difference between investor returns and investment returns—can be substantial, as investors often mistime their entries and exits, selling during downturns and buying during peaks. With assets as volatile as Bitcoin, the risk of such behaviour is amplified.
The other issue with Bitcoin is the presence of ‘whales’, which is a term used to describe individuals or entities that possess a substantial amount of the asset. Crypto whales matter because they can significantly influence market sentiment and price movements where a huge ‘dump’ causes a sharp downward spike in the price of the asset. The opposite is also true where they can equally drive the price up by aggressive purchasing before ‘pulling the rug’ on smaller investors. Significant trades can also impact the liquidity of a specific coin which further causes heightened volatility.
Ultimately, investor behaviour is best managed through careful position sizing to ensure the impact of a 100% loss is not so great that the portfolio completely fails to achieve its stated objectives. With assets like Bitcoin, the mindset that an investment can fall to zero, and you are comfortable losing it all, can be helpful to manage any irrational behaviour as it removes an element of investor emotions.
Final Thoughts:
We have explored the arguments for an allocation to Bitcoin in a multi-asset class portfolio while considering the inherent risks in this emerging asset class. A balanced perspective is appropriate in this case, as a small allocation determined by the investor’s risk tolerance can improve the portfolio’s risk-adjusted return outcomes.
The difficulty around determining a consistent crypto risk premium firmly places this asset in the speculative bucket and its low positive correlation to traditional asset classes makes it somewhat of an alternative asset.
The most critical question remains: Does including Bitcoin improve the ability of a portfolio to meet its objectives?
Bitcoin’s place in a portfolio should not be determined by its potential upside alone, but by its ability to contribute to long-term financial objectives while aligning with the investor’s risk tolerance and return needs. From a quantitative perspective, there may be portfolio benefits to introducing a very small allocation to Bitcoin, however, an emphasis on diversification and disciplined investing will help investors, in conjunction with their adviser, navigate the complexities of Bitcoin and its evolving role in financial markets.
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Kind regards,
Jason Rademan and Alexa Bablusha
Jason Rademan, CFP , TEP
PARTNER
Jason is a partner and private wealth adviser at Lipman Burgon & Partners. He has over 15 years of experience in wealth management and other financial services advisory roles. Prior to joining Lipman Burgon & Partners, he spent six years working for a Canadian Private Bank, gaining experience in managing high-net-worth clients and family offices.
Jason works closely with the investment team to originate and evaluate specialist, private market opportunities (e.g. private equity, private credit and hedge funds). He is involved in the management of family office clients in Sydney and has experience working with multi-jurisdiction tax structuring and clients migrating to Australia.
Jason holds a Bachelor of Commerce, Higher Diploma in Tax Law and Graduate Diploma in Financial Planning. Jason is a Certified Financial Planner (CFP) and holds a full Trust & Estate Practitioner (TEP) designation with the Society of Trust and Estate Practitioners.
Alexa Bablusha
INVESTMENT ANALYST
Alexa is an investment analyst at Lipman Burgon & Partners. In this role, she works closely with the investment team conducting key research and analysis for client investments. Prior to joining the firm, Alexa worked with Macquarie Group.
Alexa holds a Bachelor of Commerce and is pursuing the Chartered Financial Analyst (CFA) designation.
1 Venn Disclaimer: For all quantitative analysis, we have used our investment analytics platform, Venn by Two Sigma. Venn uses a multifactor approach consisting of 18 systematic factors to decompose the drivers of risk and return in an investment. Forecasts are calculated by using historical data, historical factor returns, and capital market assumptions to project future risk and returns. These forecasts are subject to change as returns data for factors and investments get updated.
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