The case for Crypto (Bitcoin) Allocation in Capital Efficient Portfolios

When it comes to crypto I’m anything but an expert.

I have no specialized knowledge or insights to share with you about the intricacies of the ever-evolving crypto universe.

I can’t name more than 10 coins.

Moreover, I didn’t quit my job to trade shitcoins.

In fact, I’ve had well-intentioned folks inform me that I don’t have a real job in the first place (I’m a travel content creator).

Touche.

Someone obsessively fixated on bitcoin with laser eyes and a chaotic neon filled scene

However, when it comes to assembling capital-efficient portfolios, crypto (more specifically Bitcoin) is now an option available to investors utilizing ETFs and mutual funds.

Thus, does an allocation to crypto (Bitcoin) warrant careful consideration for your otherwise diversified portfolio?

Maybe.

That’s what we’re going to explore here today.

Expanded Canvas Portfolios featuring Bitcoin

Hey guys! Here is the part where I mention I’m a travel content creator as my day job! This investing opinion blog post is entirely for entertainment purposes only. Most investors should not use leverage in any way, shape or form. There could be considerable errors in the data I gathered. This is not financial advice. Do your own due diligence and research. Consult with a financial advisor. 

Expanded Canvas Portfolios

Let’s start with the following hypothetical asset allocation scenario.

With our first two moves on the chess board, we’re laying down the following foundational puzzle pieces:

40% RSSB – Return Stacked Global Stocks & Bonds ETF (100% Global Stocks + 100% Bonds)
20% RSST – Return Stacked US Stocks & Managed Futures ETF (100% US Stocks + 100% Managed Futures)

With just 60% of our resources, we’ve put together a 60/40 portfolio and already carved out a nice 20% slice of managed futures (trend) in our alternative sleeve.

Because we’re painting with a bigger canvas, we’ve got 40% creative space left over to brushstroke with other uncorrelated asset classes.

Out of that 40% available space, does a 0% to 5% sprinkling of Bitcoin to our expanded canvas portfolio make some sort of sense?

Possibly.

Bitcoin and gold stacked on top of each other like pancakes

Mainstream Adoption And Availability Of Bitcoin

Bitcoin is polarizing.

You have its lovers and haters with few folks in between.

Bitcoin is polarizing some love it some hate it few in between

In the past, it has been easy to dismiss Bitcoin as a purely “speculative investment” given its lack of mainstream adoption by major industry players alongside its lack of approval by the SEC for spot ETFs.

That’s now changed.

These days you can grab your spot Bitcoin ETF from the Blackrock(s) and Fidelity(s) of the investosphere.

North of the border, you’ll even find mainstream asset allocation funds that include Bitcoin as part of their equation.

Feast your eyes upon this Fidelity asset allocation fund as an example:

FBAL.TO: Fidelity All-in-One Balanced ETF 

FBAL fidelity all in one asset allocation fund in Canada with factor and crypto allocation to Bitcoin
source: Fidelity.ca

These funds distinguish themselves by their factor exposure (momentum, value, quality and low volatility) but they’ve also ALL got a slice of crypto (Bitcoin) thrown in for good measure.

Here is the rest of the product range:

Fidelity All-In-One Funds featuring Bitcoin allocation in Canada
fidelity.ca

FCNS.TO ETF – Fidelity All-in-One Conservative ETF
FEQT.TO ETF – Fidelity All-in-One Equity ETF
FGRO.TO ETF – Fidelity All-in-One Growth ETF

So how have these contrarian asset allocation alternatives faired compared to their MCW vanilla bredren?

So far, so good.

Check it out.

FBAL vs VBAL vs XBAL Performance Summary

Fidelity Asset Allocation Funds vs Vanguard Asset Allocation Funds
source: legacy.portfoliovisualizer.com (The investment performance results presented here are based on historical backtesting and are hypothetical. Past performance, whether actual or indicated by historical tests of strategies, is not indicative of future results. The results obtained through backtesting are only theoretical and are provided for informational purposes to illustrate investment strategies under certain conditions and scenarios.)

CAGR: 9.12% vs 6.10% vs 6.37%
RISK: 9.29% vs 8.90% vs 9.02%
WORST YEAR: -7.10% vs -11.39% vs -11.17%
MAX DD: -12.35% vs -15.02% vs -15.25%
SHARPE: 0.68 vs 0.38 vs 0.41
SORTINO: 1.04 vs 0.57 vs 0.61

The factor-focused Fidelity funds with Bitcoin have outperformed Vanguard and iShares in terms of both returns and risk management in an albeit short sample size backtest.

Bitcoin thumbs up and thumbs down pros and cons

The Case For and Against Bitcoin Allocation

Here is a list of what is generally considered the pros and cons for those thinking of Bitcoin.

Top 10 Pros of Bitcoin Allocation

  1. Decentralization and Independence: Bitcoin operates outside the control of any central authority, making it immune to government interference.
    • Not influenced by central bank policies.
    • Resistant to censorship or political agendas.
    • Offers autonomy to holders.

    Tip: Bitcoin can provide financial independence if you’re looking for an asset outside government control.

  2. High Return Potential: Bitcoin has historically delivered high returns over the long term.
    • High appreciation since its inception.
    • Potential for massive gains during bull markets.
    • Adoption by institutions may drive future price growth.

    Tip: Hold Bitcoin with a long-term mindset to capitalize on its potential upside.

  3. Global Accessibility: Bitcoin can be accessed and transferred globally with minimal barriers.
    • No need for a traditional bank account.
    • Easy cross-border transfers.
    • Available 24/7, unlike stock markets.

    Tip: Bitcoin is ideal for those looking for a truly global, borderless currency.

  4. Portability: Bitcoin is highly portable, allowing you to move large amounts of wealth with ease.
    • Stored digitally on mobile devices or hardware wallets.
    • No physical limitations.
    • Easy to transfer anywhere in the world.

    Tip: Bitcoin is a convenient way to store and move wealth without carrying physical assets.

  5. Transparency and Security: Bitcoin’s blockchain ensures that all transactions are publicly verifiable.
    • Immutable ledger provides trust.
    • Highly secure and resistant to fraud.
    • Transparency builds confidence in the system.

    Tip: Bitcoin’s transparency can reassure investors concerned about fraud or manipulation.

  6. Limited Supply: Bitcoin has a fixed supply of 21 million coins, creating scarcity.
    • Fixed supply makes it immune to inflation.
    • Deflationary in nature, driving value higher over time.
    • Attracts investors seeking scarcity-driven value.

    Tip: Bitcoin’s capped supply makes it an attractive store of value, similar to gold.

  7. Portfolio Diversification: Bitcoin is uncorrelated with traditional assets like stocks and bonds, making it a good diversification tool.
    • Reduces overall portfolio risk.
    • Can improve risk-adjusted returns.
    • Acts as a hedge during market downturns.

    Tip: Adding Bitcoin can help diversify your portfolio, reducing reliance on traditional markets.

  8. Inflation Hedge: Bitcoin is seen as a hedge against fiat currency inflation.
    • Hard-coded supply cap of 21 million coins.
    • Resilient against currency devaluation.
    • Attracts investors in inflationary environments.

    Tip: Consider Bitcoin as a hedge if you are worried about fiat inflation.

  9. Institutional Adoption: Increasing institutional interest is legitimizing Bitcoin as a mainstream investment.
    • Hedge funds, pension funds, and corporations are investing.
    • Institutional backing drives demand.
    • Increases Bitcoin’s credibility as a safe investment.

    Tip: Follow institutional trends to gauge Bitcoin’s long-term viability.

  10. Emerging Payment System: Bitcoin is increasingly being accepted as a method of payment.
  • More merchants accepting Bitcoin globally.
  • Enables online and offline transactions.
  • Growth in the Lightning Network improves transaction speed.

Tip: Bitcoin’s use as a payment system continues to grow, expanding its practical utility.

Top 10 Cons of Bitcoin Allocation

  1. High Volatility: Bitcoin’s price is highly volatile, leading to potential large losses in a short period.
    • Wild price swings within hours or days.
    • Unsuitable for short-term investors.
    • Can lead to panic selling during downturns.

    Tip: Only invest in Bitcoin if you can tolerate its extreme volatility.

  2. Regulatory Uncertainty: Governments around the world are still developing regulations for Bitcoin, which creates uncertainty.
    • Potential for stricter regulations or outright bans.
    • Unclear tax treatment in some jurisdictions.
    • Legal issues can affect price and usability.

    Tip: Stay informed about your local Bitcoin regulations to avoid legal issues.

  3. Security Risks: Bitcoin storage requires strong security practices, as losing your private key means losing access to your funds.
    • Susceptible to hacks and scams.
    • Lost private keys cannot be recovered.
    • Exchange hacks pose a risk to stored Bitcoin.

    Tip: Use hardware wallets and take security seriously when storing Bitcoin.

  4. Energy Consumption: Bitcoin’s Proof of Work consensus mechanism requires significant energy, raising environmental concerns.
    • High energy usage for mining operations.
    • Bitcoin mining criticized for its carbon footprint.
    • May face future restrictions or penalties due to energy consumption.

    Tip: Be mindful of Bitcoin’s environmental impact when considering allocation.

  5. Scalability Issues: Bitcoin faces scalability challenges, which could limit its adoption as a global payment system.
    • Slow transaction speeds.
    • High fees during network congestion.
    • Competing cryptocurrencies offer faster alternatives.

    Tip: Bitcoin’s scalability improvements, like the Lightning Network, could alleviate this issue in the future.

  6. Lack of Consumer Protection: Bitcoin transactions are irreversible, and there is little consumer protection if something goes wrong.
    • No recourse for lost or stolen funds.
    • No central authority to mediate disputes.
    • Scams and frauds are prevalent.

    Tip: Be extra cautious when transacting with Bitcoin, as there is little protection if something goes wrong.

  7. Limited Adoption: Although growing, Bitcoin adoption is still limited compared to traditional currencies and financial products.
    • Not widely accepted as a method of payment.
    • Volatility discourages its use in day-to-day transactions.
    • Competing cryptocurrencies may challenge Bitcoin’s dominance.

    Tip: Bitcoin’s adoption is expanding but remains a work in progress.

  8. Technological Complexity: Bitcoin can be complex for the average investor to understand and use.
    • Steep learning curve for new users.
    • Requires understanding of wallets, keys, and blockchain technology.
    • Not user-friendly for those unfamiliar with digital assets.

    Tip: Take the time to educate yourself about how Bitcoin works before investing.

  9. Tax Complications: Bitcoin taxation varies greatly depending on your country and can be complex to manage.
    • Treated differently across jurisdictions.
    • Capital gains tax applies to most transactions.
    • Keeping track of every transaction can be burdensome.

    Tip: Consult with a tax professional to understand how Bitcoin is taxed in your country.

  10. Market Manipulation: Bitcoin markets are relatively small compared to traditional financial markets, making them vulnerable to manipulation.
  • Prone to price manipulation by large holders (whales).
  • Unregulated markets increase the risk of artificial price movements.
  • Pump-and-dump schemes are common in smaller crypto markets.

Tip: Be cautious of market manipulation and avoid making decisions based on sudden price movements.

What Others Have To Say About Bitcoin Large Megaphone

What Others Have To Say (Pros and Cons of Bitcoin)

I highly value the opinions and contributions of friends and acquaintances on Twitter.

Here is what they have to say about the pros and cons of Bitcoin with respect to capital-efficient portfolios:

Creative Capital Efficient ETFs with Bitcoin

Creative Bitcoin Products Offering Capital-Efficient And Risk-Managed Exposure

Aside from mainstream exposure to spot Bitcoin ETFs from major providers, capital-efficient investors have other interesting options to consider.

Let’s highlight a few of those:

BTGD ETF – STKD Bitcoin & Gold ETF

Recently minted BTGD provides investors $1 of exposure to Bitcoin and $1 exposure to Gold for every dollar invested.

In other words, if you were to allocate 5% to the fund you’d have 5% exposure to gold and 5% exposure to Bitcoin from an asset allocation standpoint.

SPBC ETF – Simplify US Equity PLUS GBTC ETF

For investors not wanting to shave down their equity exposure this unique capital-efficient product from Simplify may warrant consideration.

100/10 US Equities + Bitcoin

If you were to allocate 20% to the fund you’d have 20% exposure to US equities and 2% exposure to Bitcoin.

BTRN ETF – Global X Bitcoin Trend Strategy ETF

Finally, for asset allocators that are concerned about the volatility and downside risk of Bitcoin, this trend following product scales back exposure during downtrends.

Moreover, its default position is only 50% exposure (via futures) and it’ll increase/decrease in 25% increments depending on trend signal.

BTRN ETF futures exposure from a scale of 100 to 0
source: GlobalX

Taming bitcoin with a whip hedging strategies to protect against volatility and drawdowns

10-Year Backtesting Bitcoin Exposure: Risk Management / Hedging Options

Let’s explore what adding a 5% slice of Bitcoin (market price) does to an all-equity S&P 500 portfolio from the perspective of a 10-year backtest.

100% S&P 500 vs 95% S&P 500 + 5% Bitcoin 10 year backtest performance summary
source: legacy.portfoliovisualizer.com (The investment performance results presented here are based on historical backtesting and are hypothetical. Past performance, whether actual or indicated by historical tests of strategies, is not indicative of future results. The results obtained through backtesting are only theoretical and are provided for informational purposes to illustrate investment strategies under certain conditions and scenarios.)

Indeed, returns are enhanced considerably but risk has also gone up (stdev) alongside a more challenging worst year and maximum drawdown.

One way to potentially manage the excessive volatility of Bitcoin (with its propensity to lay rotten eggs [-70% year]) is to pair it with a return smoother like BTAL ETF.

It’s all about position sizing and asset allocation over here.

In order to get the right cocktail mix, a 2:1 or 3:1 ratio seems prudent.

Let’s try this again by shaving down 20% of our S&P 500 exposure to add 15% BTAL to the equation.

In other words, we’ve got as follows:

100% SPY

vs

80% SPY + 15% BTAL + 5% ^BTC (Bitcoin Market Price USD)

100% S&P 500 vs 80% S&P and 15% BTAL and 5% Bitcoin
source: legacy.portfoliovisualizer.com (The investment performance results presented here are based on historical backtesting and are hypothetical. Past performance, whether actual or indicated by historical tests of strategies, is not indicative of future results. The results obtained through backtesting are only theoretical and are provided for informational purposes to illustrate investment strategies under certain conditions and scenarios.)

Here we’ve got the best of both worlds.

Better returns and enhanced risk management across the board (Stdev, Worst Year, Max DD, Sharpe, Sortino).

The key point here is that IT IS possible to tame your Bitcoin exposure with the right mix of hedging and tail-risk protection.

Position size is everything with someone humorously indicating the small size of bitcoin with their thumb and index finger

Position / Allocation Size Is Everything

To say Bitcoin has been hella volatile throughout the years is certainly an understatement!

Check out its returns (positive vs negative) throughout the years at market price:

Bitcoin market price annual returns
source: legacy.portfoliovisualizer.com (The investment performance results presented here are based on historical backtesting and are hypothetical. Past performance, whether actual or indicated by historical tests of strategies, is not indicative of future results. The results obtained through backtesting are only theoretical and are provided for informational purposes to illustrate investment strategies under certain conditions and scenarios.)

How much damage Bitcoin can inflict upon your portfolio depends on how much space it occupies.

Let’s imagine a worst-case scenario of it being down close to -80% for the year.

If you’re allocating 5% of your resources that’s only a -4% overall sting.

At 10% you’re nailed by -8%.

You get the picture.

Well, what about if it went poof?

-100%.

Wiped off the map as some fear (an unlikely scenario).

Well, that would be a one time -5% or -10% flick to the nose.

At the end of the day it’s all about asset allocation and taking on the appropriate level of risk you can potentially handle given its volatile nature.

You can hedge against it with return smoothers and portfolio protectors such as BTAL and/or CAOS or just simply reduce your exposure to a level where you can handle it being down severely.

Viewing it as a line item makes it hard to handle.

Zooming out the portfolio level is crucial IMO.

Nomadic Samuel views on bitcoin passive beard look

Nomadic Samuel’s Views On Bitcoin

As I mentioned previously, at the beginning of the article, I’m not a crypto expert nor do I pretend to be one.

What I do recognize though is the return potential of Bitcoin in a capital-efficient portfolio.

I specifically view it as a diversifier as it historically has had low correlations with markets and it is also uncorrelated with many other asset classes and strategies (both mainstream and alternative).

Bitcoin correlations with markets and alternatives
source: legacy.portfoliovisualizer.com (correlations are from Oct, 2014 to Sep, 2024)

Hence, I want it in my portfolio and I’ve created space for it.

In particular, I’ve decided to allocate to BTGD to boost my exposure to gold and to lay down a 5% foundation for Bitcoin.

I’ve got some hedging products to help handle its volatile nature.

I’ve also made sure to carve out space for adaptive strategies (trend following managed futures) and long-short macro that offer absolute return potential.

Hence, it’s not a make-or-break part of my overall portfolio equation but I’ve also gone beyond merely dipping my toes into the pool by being at 5% vs say just 1 or 2%.

I’d say it’s far from being a polar plunge but it’s not an insignificant amount either.

I’m excited to share the “Nomadic Samuel 2024 Portfolio” in the coming weeks.

For the time being what I can tell you is that I’ve got a 5% allocation to BTGD ETF in one of my accounts.

Expanded Canvas Portfolio ideas with bitcoin

Expanded Canvas Portfolio Ideas (With Bitcoin)

These asset allocation ideas and model portfolios presented herein are purely for entertainment purposes only. This is NOT investment advice. These models are hypothetical and are intended to provide general information about potential ways to organize a portfolio based on theoretical scenarios and assumptions. They do not take into account the investment objectives, financial situation/goals, risk tolerance and/or specific needs of any particular individual. 

I’d say we’re at the stage now to potentially explore a few different portfolio options using Bitcoin as a potential return enhancer / diversifier.

Instead of using mainstream spot Bitcoin funds from Goliath ETF providers, we’ll check out how to possibly integrate Bitcoin into your portfolio with the three funds I’ve previously mentioned:

1) BTGD ETF – STKD Bitcoin & Gold ETF

2) SPBC ETF – Simplify US Equity PLUS GBTC ETF

3) BTRN ETF – Global X Bitcoin Trend Strategy ETF

Enhanced 60/40 Portfolio with bitcoin

Enhanced 60/40 Expanded Canvas Portfolio

40% RSSB
20% RSST
20% QSPIX
15% BTAL
5% BTGD

Exposures:

60% Equities (Global + US)
40% Bonds
20% Managed Futures (Trend)
20% Style Premia
15% M/N Anti-Beta
5% Bitcoin
5% Gold

Here we’ve got a 5 fund + 7 strategy portfolio.

We’ve made sure to include a 3:1 hedge for Bitcoin with BTAL.

We’ve also got adaptive assets (managed futures trend) and plenty of absolute return potential (style premia).

Variation Options: Consider shaving down 7.5% of BTAL to create space for 7.5% CAOS and/or swap FLSP or QIS ETFs to replace mutual fund QSPIX if you want an all-ETF portfolio.

Let’s try to simulate a 10-year backtest:

60/40 Enhanced Canvas Asset Allocation vs 60/40
source: legacy.portfoliovisualizer.com (The investment performance results presented here are based on historical backtesting and are hypothetical. Past performance, whether actual or indicated by historical tests of strategies, is not indicative of future results. The results obtained through backtesting are only theoretical and are provided for informational purposes to illustrate investment strategies under certain conditions and scenarios.)
Enhanced 60/40 vs 60/40 performance review
source: legacy.portfoliovisualizer.com (The investment performance results presented here are based on historical backtesting and are hypothetical. Past performance, whether actual or indicated by historical tests of strategies, is not indicative of future results. The results obtained through backtesting are only theoretical and are provided for informational purposes to illustrate investment strategies under certain conditions and scenarios.)

Past results don’t equal future performance…but damn…that’s some serious potential outperformance from a returns / risk management standpoint.

Spy Hunter expanded canvas portfolio

Spy Hunter Expanded Canvas Portfolio

20% PSLDX
20% RSST
20% SPBC
20% GDE
20% HCMT

Exposures:

Offensive Mode

118% Equities
20% Managed Futures
20% Bonds
18% Gold
2% Bitcoin

Defensive Mode

78% Equities
20% Managed Futures
20% Bonds
20% Cash
18% Gold
2% Bitcoin

We’re hunting down SPY (S&P 500) with this aggressive tactical all-equity portfolio featuring no compromises.

Diversification (with 20% to 18% slabs) is our weapon of choice.

Bitcoin doesn’t play a major role here with just a 2% allocation.

SPY Hunter vs SPY portfolio performance review
source: legacy.portfoliovisualizer.com (The investment performance results presented here are based on historical backtesting and are hypothetical. Past performance, whether actual or indicated by historical tests of strategies, is not indicative of future results. The results obtained through backtesting are only theoretical and are provided for informational purposes to illustrate investment strategies under certain conditions and scenarios.)

We’re limited to a short live backtest (with funds) but so far SPY Hunter has been turning the screws against plain ‘ole SPY.

Harry Browne inspired bitcoin portfolio

HB Inspired Balanced Expanded Canvas Portfolio

40% RSST
40% RSBY
5% GLD
5% BTRN
5% BTAL
5% CAOS

Exposures:

40% Equities
40% Bonds
40% Managed Futures (Trend)
40% Carry (Multi-Asset)
0 to 5% Bitcoin
5% Gold
5% OTM Put
5% M/N Anti-Beta

We’re inspired by Harry Browne’s Permanent Portfolio where we’ve used a modest 1.6X leverage (40% pie) vs his 25% pizza slices.

Cash and Gold are replaced with Managed Futures and Carry.

Bitcoin is one of four other strategies at 5% allocation.

However, given that this is the most defensive portfolio, we’ve included BTRN here which can shrink to 0% allocation during severe downturns.

Nomadic Samuel final thoughts on Bitcoin

Nomadic Samuel Final Thoughts

This is my first dedicated article on my site to Crypto / Bitcoin.

I definitely felt a bit out of my comfort zone.

However, since I do have a 5% allocation to Bitcoin in my personal portfolio, I thought it would be worthwhile to explore this topic a bit more.

Here we’ve examined how you can build a capital-efficient portfolio with potential allocations to Bitcoin at 5%, 2% and 0% (trend dependent).

IMO, some of these creative new Bitcoin products are tailor-made for expanded canvas portfolios.

I’m happy they exist.

And I’m hoping to write more about them in the future.

However, at this point in the article, it’s time to turn things over to you.

What do you think of Bitcoin as an investment?

Is it on your Expanded Canvas Portfolio radar?

Let me know in the comments below.

Important Information

Investment Disclaimer: The content provided here is for informational purposes only and does not constitute financial, investment, tax or professional advice. Investments carry risks and are not guaranteed; errors in data may occur. Past performance, including backtest results, does not guarantee future outcomes. Please note that indexes are benchmarks and not directly investable. All examples are purely hypothetical. Do your own due diligence. You should conduct your own research and consult a professional advisor before making investment decisions. 

“Picture Perfect Portfolios” does not endorse or guarantee the accuracy of the information in this post and is not responsible for any financial losses or damages incurred from relying on this information. Investing involves the risk of loss and is not suitable for all investors. When it comes to capital efficiency, using leverage (or leveraged products) in investing amplifies both potential gains and losses, making it possible to lose more than your initial investment. It involves higher risk and costs, including possible margin calls and interest expenses, which can adversely affect your financial condition. The views and opinions expressed in this post are solely those of the author and do not necessarily reflect the official policy or position of anyone else. You can read my complete disclaimer here

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