How to incorporate Bitcoin into your investment portfolio effectively
As Bitcoin becomes more accessible through ETFs, investors face key decisions about allocation, volatility management, and correlation with traditional assets.
Strategic allocation approaches
As cryptocurrencies become more accessible through exchange-traded funds (ETFs), investors face increasingly complex decisions regarding how to integrate digital assets into their portfolios.
Key considerations include whether to index crypto holdings, how to manage volatility, understand correlation with other asset classes, and determine appropriate weighting.
Trading platform users must decide between concentrating on large-cap digital assets like Bitcoin and Ethereum or exploring broader crypto ecosystem exposure.
Some institutions advocate for sticking with the most liquid and widely traded cryptocurrencies, arguing that the current crypto landscape lacks enough mature alternatives to justify broader indexing.
Managing volatility and institutional adoption
Cryptocurrencies are notoriously volatile, a characteristic often viewed as a drawback, though this volatility is frequently attributed to the early-stage nature of the asset class.
Much of the current crypto volatility is driven by the behaviour of retail investors, who still dominate the space.
As institutional participation and market liquidity grows, the expectation is that volatility will moderate, similar to how other assets like gold evolved before becoming broadly adopted.
Bitcoin’s volatility has evolved significantly since its inception in 2009, reflecting the maturation of the cryptocurrency market. In its early years, Bitcoin exhibited extreme price swings - for instance, in 2013, its price surged from around $13.00 in January to over $1,100.00 by December, only to crash below $200.00 in the following years. Similar dramatic fluctuations occurred in 2017 and 2018, when bitcoin skyrocketed to nearly $20,000.00 before plummeting to around $3,000.00.
However, more recent trends suggest a gradual decline in volatility. For example, in 2023, Bitcoin’s price ranged between $16,000.00 and $31,000.00 - a far narrower band than in earlier cycles - and despite macroeconomic pressures, daily price movements were less erratic.
While Bitcoin remains more volatile than traditional assets like gold or the S&P 500, the reduction in sharp price swings signals that the asset may be stabilising as it becomes more integrated into mainstream finance.
CFD trading participants should understand that as ownership shifts and bitcoin becomes more embedded within diversified portfolios, its risk profile may evolve.
Correlation with traditional markets
From a portfolio construction perspective, Bitcoin's correlation with other investments remains a critical factor for diversification potential.
On a long-term basis, Bitcoin's correlation to traditional equities like the S&P 500 remains low - similar to that of gold.
However, short-term movements can differ, with Bitcoin exhibiting periods of higher correlation with risk assets during broad market selloffs.
Online trading investors should understand the duration and frequency of these correlation spikes when determining Bitcoin's true diversification potential.
Optimal portfolio weightings
When considering portfolio weighting, research suggests that allocating between 1% and 5% of a portfolio to Bitcoin can enhance risk-adjusted returns.
The 3% allocation level is often cited as optimal, improving performance without significantly increasing downside risk.
Crypto can be viewed similarly to other alternative investments like venture capital or high-growth equities.
Share dealing investors should consider a modest allocation aligned with broader diversification goals, combined with disciplined rebalancing.
Technical analysis and price outlook
The June-to-July Bitcoin rally briefly took it above its December-to-January highs at $108,287.62-to-$109,354.00 to a $110,598.55 one-month high before consolidating.
Bitcoin daily candlestick chart
Bitcoin’s advance may short-term struggle below its record May $111,965.80 high, and could retrace lower towards its early July $107,335.44 low, with a fall potentially opening the door for the 55-day simple moving average (SMA) at $106,407.78 and the early July low at $105,159.03 to be reached.
Bitcoin monthly candlestick chart
A rise in Bitcoin above its May-to-July highs at $110,617.03-to-$111,965.80 would potentially put the 261.8% Fibonacci extension at $122,056.92, projected from the 2022 low, on the map.
Remember that cryptocurrency markets are unregulated and highly volatile, and that you may lose all your investments. Consider your investment goals and risk tolerance before investing.
Important to know
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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