The arrival of the new spot Bitcoin ETFs could lead to a dramatic change in how much Bitcoin investors allocate to their portfolios.
With the launch of the new spot Bitcoin (BTC -1.06%) ETFs in January, there's now growing debate about just how much Bitcoin is prudent to hold in a well-diversified portfolio. Until this year, the consensus view had been that Bitcoin should account for only a tiny portion of your overall portfolio. As a general rule of thumb, 1% was the norm, and any percentage over 5% was considered ultra-aggressive.
However, according to Cathie Wood of Ark Invest, the optimal Bitcoin portfolio allocation might actually be closer to 19.4%. That's an incredibly high percentage, and it's worth a closer look at some of her underlying assumptions.
Bitcoin and portfolio optimization
In Ark Invest's just-published "Big Ideas 2024" research report, the firm laid out the core building blocks of how it arrived at this figure of 19.4%. The starting point is thinking about Bitcoin as a stand-alone asset class with a unique risk-reward profile.
As Ark Invest points out, Bitcoin has outperformed every major asset class over long time horizons. Over the last seven years, the annualized return for Bitcoin was 44%. In contrast, the annualized return across all traditional asset classes was just 5.7%. If you pick any 5-year time horizon, there is a high probability that Bitcoin will outperform any other asset class.
And there's another property of Bitcoin that makes it attractive. Bitcoin's correlation with traditional asset classes is low. According to Ark Invest, the correlation coefficient with other asset classes is just 0.27. Any correlation coefficient under 0.40 is considered low, so Bitcoin really does appear to be an asset that's insulated from the zigs and zags of the broader market.
Thus, when you use a portfolio optimization model, it's going to tell you to add a lot of Bitcoin if you want to maximize potential rewards and minimize risk. According to Ark Invest, the optimal allocation of Bitcoin to a portfolio in 2023 was 19.4%. That's a big increase from the year-earlier period, when the optimal allocation was 6.2%. And that, in turn, was a significant increase from the year-earlier period, when the optimal allocation was 4.8%.
In fact, in every year since 2015, the optimal allocation to Bitcoin has been rising. And that means allocations to more traditional asset classes -- such as stocks and bonds -- have been falling. In 2023, says Ark Invest, the optimal allocation to stocks was only 30%.
Is Cathie Wood right?
It's hard to argue with Bitcoin's historical returns. In the period from 2011 through 2021, Bitcoin was the top-performing asset class in the world, and it wasn't even close. The same was true in 2023, when Bitcoin (up more than 150%) far outperformed every traditional asset class. While you can argue that past performance is no guarantee of future results, the impressive track record for Bitcoin now extends over a decade.
Image source: Getty Images.
Where I am concerned, however, is with the implicit assumption that the arrival of the new Bitcoin ETFs won't change the way Bitcoin performs in the future. With Wall Street now aggressively promoting its new Bitcoin ETFs, will the "new" Bitcoin behave the same way as the "old" Bitcoin?
For example, consider Bitcoin's correlation with other assets. One reason why Bitcoin has historically been so uncorrelated with traditional asset classes is because it took Wall Street so long to embrace crypto. It was only in 2021 (during the last crypto rally) that big Wall Street banks began to think of Bitcoin as an asset class, and only in 2022 when BlackRock (NYSE: BLK) -- the largest asset manager in the world -- decided to make Bitcoin available to its institutional investor clients.
But now Wall Street is embracing crypto. The top spot Bitcoin ETF issuers now have over $4 billion in assets under management. That works out to 100,000 Bitcoins that they've acquired in an incredibly short period of time. If Bitcoin ETFs continue to go mainstream, then it would only make sense that some of the correlations with traditional asset classes would start to tighten. As a result, when you plug the updated numbers into a portfolio optimization model, it's going to suggest you should hold less Bitcoin.
Is Bitcoin going to $2 million?
So what would happen if investors worldwide really did decide to allocate 19% of their portfolios to Bitcoin? Ark Invest ran the numbers and came up with a price tag of over $2 million for Bitcoin. That's double Ark Invest's previous $1 million price estimate for Bitcoin. The logic here is simple: Enormous buying pressure on Bitcoin is going to push its price to stratospheric levels.
While I'm long-term bullish on Bitcoin, and certainly relish the idea of owning Bitcoin valued at $2 million per token, I'm also pragmatic. There are still plenty of really smart investors who believe that you should hold no Bitcoin in your portfolio, among them Warren Buffett and the late Charlie Munger.
So before you rush out and boost your Bitcoin allocation to 19%, make sure you recognize the risks and potential perils involved. That percentage is a dramatic increase from previously suggested allocation levels, and may be entirely too risky for many investors getting into crypto for the first time.
Dominic Basulto has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.
FAQs
As a general rule of thumb, 1% was the norm, and any percentage over 5% was considered ultra-aggressive. However, according to Cathie Wood of Ark Invest, the optimal Bitcoin portfolio allocation might actually be closer to 19.4%.
What is the BTC price prediction for Cathie Wood? ›
In January 2024, Wood stated that Bitcoin could hit $1.5 million by 2030 after "the probability of the bull case has increased with this SEC approval. This is a green light." Before approving the spot ETFs, Wood predicted that Bitcoin could reach $1 million by 2030.
How much to invest in Bitcoin to become a millionaire? ›
While this is a lower-bound scenario, we can use it as a baseline to show what it takes for investors to become Bitcoin millionaires. Assuming an annualized return of 30%, one would need to invest roughly $85,500 annually for five years to hit millionaire status. Over 10 years, this number falls to around $18,250.
Is Bitcoin a good investment in 2024? ›
CRYPTO: BTC
In just over a decade, the cryptocurrency has grown from just a few pennies per digital coin to more than $50,000 by 2021, taking the world by storm. With its price sitting at roughly $70,000 in June 2024, the next major landmark in sight is the coveted six-figure mark.
Should investors include Bitcoin in their portfolios? ›
Therefore, our results suggest that investors should include Bitcoin in their portfolio as it generates substantial higher risk-adjusted returns.
What is the Ethereum prediction for Cathie Wood? ›
At one of these events, Wood asserted that Ethereum could reach a market capitalization of $20 trillion by 2032. The current market cap of ETH is around $400 billion and has approached $500 billion in 2024.
What crypto will skyrocket with Bitcoin halving? ›
CRYPTO: ETH
But don't forget about altcoins. These, too, tend to perform very well after any Bitcoin halving, given that a rising Bitcoin price tends to send the entire crypto market higher. As they say, a rising tide lifts all boats.
How much will $1000 worth of Bitcoin be worth in 2030? ›
If Wood is correct and Bitcoin does reach $3.8 million by 2030, an investment of $1,000 would be worth over $60,000. This would result in a compound annual growth rate (CAGR) of over 100%.
How much will $1 Bitcoin be worth in 2025? ›
Bitcoin (BTC) Price Prediction 2030
| Year | Price |
|---|
| 2025 | $ 70,515.92 |
| 2026 | $ 74,041.72 |
| 2027 | $ 77,743.80 |
| 2030 | $ 89,998.17 |
1 more rowMost financial experts recommend limiting crypto exposure to less than 5% of your total portfolio. Crypto is considered a high-risk asset class. Limiting allocation helps manage overall volatility and risk. Those new to crypto investing may start with 1% to 2% as an introduction.
So, 10 times from those levels would mean that Bitcoin could go as high as $350,000, Saylor said. If this is the case, you would need to own 2.86 BTC to become a millionaire. It would cost around $190,000 today.
Can you get rich off bitcoin mining? ›
Bitcoin mining can be profitable if you contribute enough hashing power to a mining pool to receive larger rewards. If you're solo mining at home on your computer, you may never receive rewards.
What happens every 4 years with Bitcoin? ›
The Bitcoin Halving takes place about every four years and reduces the block reward by 50%. This lowers the supply of bitcoins entering the market, which increases scarcity and can act to raise its price if market conditions remain the same.
How much will Bitcoin be worth in the next 5 years? ›
Bitcoin Overview
| Year | Minimum Price | Average Price |
|---|
| 2024 | $84,475.55 | $87,676.23 |
| 2025 | $121,440.85 | $124,947.50 |
| 2026 | $166,264.37 | $171,262.87 |
| 2027 | $251,829.81 | $258,680.13 |
8 more rowsMax Keiser predicts Bitcoin to be worth $200K in 2024. Fidelity predicts one Bitcoin will be worth $1B in 2038. Hal Finney predicted $22M per Bitcoin by 2045.
How much of my portfolio should be in Bitcoin? ›
Less Than 5% Several experts argue that due to their inherent volatility, investors should allocate no more than 5% to crypto. “The allocation of crypto in a retirement portfolio can vary depending on an individual's risk tolerance and financial goals,” said Michael Collins, CFA and founder/CEO of WinCap Financial.
Do financial advisors recommend Bitcoin? ›
Although an advisor may be deeply knowledgeable about crypto, the advisor may not provide any recommendations on whether to buy or sell any digital currency.
What is the biggest risk with investing in Bitcoin? ›
Several potential drawbacks of Bitcoin include include:
Bitcoin comes with high transaction costs, and the transactions can take several minutes to complete. A large amount of Bitcoin and Ethereum mining is based in China and the Chinese government has shut mining and transactions down.
How many ETH to become a millionaire? ›
At a price of $166,000, six ETH would be worth roughly $1 million. Currently, six ETHs cost around $20,000. For reference, the entire market cap of the S&P 500 is roughly $40 trillion.
Should I have bitcoin or Ethereum? ›
Bitcoin is designed to provide an alternative to physical or fiat currency; Ethereum is intended for complex smart contracts and decentralized applications, which are believed to be part of the emerging (and theoretical) infrastructure of the future of the internet known as Web3.
Ethereum (ETH) Price Prediction 2030
| Year | Price |
|---|
| 2025 | $ 3,872.12 |
| 2026 | $ 4,065.73 |
| 2027 | $ 4,269.01 |
| 2030 | $ 4,941.92 |
1 more rowOur top pick for the cryptocurrency most likely to soar by 1000x is $PLAY, the native token of the PlayDoge ecosystem. This new meme coin boasts the popular Doge mascot in a classical 2D art style and a play-to-earn game utility.
Which crypto can give 1000x in 2024? ›
The Next 1000x Crypto: 12 Potential Contenders
- PlayDoge – Doge-inspired P2E game with the potential to be next viral 1000x crypto.
- WienerAI – Trending AI-based meme token with potential for 1000x growth. ...
- Slothana – $10 million+ Solana meme coin presale aiming for a $10 billion market capitalization.
Next Crypto to Hit $1 in 2024: Top 7 Picks 1. Pikamoon (PIKA): A 3D Play-to-Earn (P2E) Web3 game token, positioned for explosive growth. 2. Shiba Inu ($SHIB): Aimed at hitting the coveted $1 mark, bolstered by growing utility and plans for a metaverse.
Will Bitcoin reach $1,000,000? ›
Jack Dorsey believes the price of bitcoin could reach over $1 million by the end of 2030. His outlook aligns with that of other industry leaders, such as Cathie Wood, who predicted that bitcoin could go as high as $1.5 million by that time.
What is the realistic price prediction for Bitcoin? ›
Our most recent Bitcoin price forecast indicates that its value will increase by 10.8% and reach $77,215 by June 05, 2024. Our technical indicators signal about the Bullish Bullish 93% market sentiment on Bitcoin, while the Fear & Greed Index is displaying a score of 73 (Greed).
What is ark forecast for Bitcoin? ›
Cathie Wood of Ark Invest continues to ratchet up her price forecasts for Bitcoin (BTC 0.30%). At the recent Bitcoin Investor Day event in New York City, Wood boosted her 2030 Bitcoin price forecast to $3.8 million from an already lofty figure of $1.5 million.
How much will 1 Bitcoin be worth in 2040? ›
Based on our long-term Bitcoin Coin price forecast, we anticipated that prices could reach a new all-time high this year. By 2040, the maximum price of the BTC Coin is projected to be around $5,69,240.60.
