A research report from ARK Invest in 2023 highlights the consistent outperformance of Bitcoin compared to other major assets and recommends a portfolio allocation of up to 19.4% for institutional investors to maximize risk-adjusted returns.
The annual report, published on January 31, focuses on the convergence of blockchain technology, artificial intelligence, energy storage, and robotics. However, a significant portion of the report is dedicated to Bitcoin portfolio allocation, analyzing its performance since its inception and emphasizing its metrics over the past three years.
ARK’s data demonstrates Bitcoin’s superior performance over longer time periods when compared to traditional investment assets. Over the past seven years, Bitcoin has averaged an annualized return of 44%, while other major assets have only averaged 5.7%.
The report acknowledges that Bitcoin investors with a “long-term time horizon” have benefited from holding the asset for extended periods. It points out that Bitcoin’s historical volatility can sometimes mask its long-term returns due to short-term fluctuations in value.
ARK’s research explores the volatility and return profiles of traditional asset classes and suggests that a portfolio aiming for maximum risk-adjusted returns should allocate 19.4% to Bitcoin in 2023.
This allocation has significantly changed over the past decade. ARK notes that on a five-year rolling basis, an allocation to Bitcoin would have maximized risk-adjusted returns since 2015.
Additionally, ARK’s research considers a hypothetical scenario where institutional investments from the global investable asset base of $250 trillion follow its 19.4% Bitcoin portfolio allocation. If just 1% of these assets were invested in Bitcoin, the price could reach $120,000 per BTC. If the global investment base allocated the average maximum Sharpe ratio of 4.8% from 2015 to 2023, Bitcoin’s price would reach $550,000. According to ARK’s 19.4% allocation, Bitcoin would be valued at an astonishing $2.3 million per coin.
The research conducted by ARK takes into account empirical market data to arrive at its recommended 19.4% Bitcoin allocation for maximizing risk-adjusted returns. In previous years, ARK’s prescribed allocation aligned more closely with other prominent investment analysts and experts.
For example, in January 2022, Ray Dalio echoed the sentiments of billionaire investor Bill Miller, suggesting that a portfolio allocation of 1% to 2% into Bitcoin was optimal. A year earlier, investment strategists at JPMorgan recommended a 1% portfolio allocation to Bitcoin as a hedge against fluctuations in traditional asset classes such as stocks, bonds, and commodities.