In the last few blog posts we've looked at portfolios that seek to replace bonds with alts in such a way to reduce portfolio volatility the way bonds used to. In a couple of instances we've created portfolios that outperformed Vanguard Balanced Index (VBAIX) a proxy for a 60/40 portfolio and did so with a lower standard deviation. What about claims from some that Bitcoin is a miracle holding in this context?
Here's the first iteration, note that I usually talk about a 1% allocation to Bitcoin, realizing it could go to zero but I decided to use a 2% weighting for this post. The idea behind that is less as an isolated bet on asymmetry and more about the potential impact on portfolio stats.
And the results.
The portfolio goes back to 2016 so it captures a lot of different market conditions including a couple of crashes for Bitcoin. The Sortino Ratio is impressive and the correlation dropped to 80%. It has the best CAGR of the three with a lower standard deviation than SPY but not VBAIX. A lot of the return for Portfolio 1 though came in 2017 when it was up 46% versus 21% for the S&P 500.
If I change the date to start in 2018, the numbers get a little more interesting.
The Sortino Ratio drops to being merely good versus world beating and the correlation goes up. But in the shorter time period, Portfolio 1 has a slightly lower standard deviation than VBAIX and outperforms it by 295 basis points annualized. That still includes two crashes for Bitcoin.
So it kind of works. Of course there's absolutely no way to know what Bitcoin will do next. In my opinion nothing about Bitcoin has changed, it could go to a bazillion or it could go to zero, there is no outcome that would surprise me. I would also note that Portfolio 1 as constructed, rebalances annually. When I've talked in past posts about 1% for the asymmetry, the idea there is to let it grow to the moon or go to zero, but if it grows into a life changing piece of money, to sell it and let it change your life. An annual rebalance of some modest weight wouldn't achieve that outcome.
Finally, let's compare almost the same portfolio taking the 2% from GBTC out altogether and add it back into MERFX.
The CAGR came way down as did the Sortino Ratio, worst year improved a lot, max drawdown improved a little and the standard deviation came down some. GBTC is far from a perfect tracker of Bitcoin but it does track it some. The slice of Bitcoin, as people like Matt Hougan say, seems to have had a very positive impact which I find very interesting.
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