With Bitcoin hitting all-time highs and crypto ETFs seeing record inflows, even the most hardened crypto skeptics are now asking: Should I have exposure to cryptocurrencies in my portfolio, and if so, how much?

The key lies in evaluating risk-adjusted returns, which assess how efficiently a portfolio generates returns relative to the level of risk taken. Rather than simply chasing higher returns, this approach considers whether the added risk is justified by the additional performance. Incorporating cryptocurrency into a portfolio aims to balance the potential for higher returns against the volatility it introduces, with strong risk-adjusted returns indicating effective compensation for the risk taken.

This is where the Sharpe ratio becomes a valuable tool. By quantifying the relationship between returns and risk, the Sharpe ratio allows investors to compare portfolios or assets on a level playing field. A higher Sharpe ratio suggests that an asset or portfolio is delivering greater returns per unit of risk, making it more efficient. When applied to portfolios with cryptocurrency exposure, the Sharpe ratio can highlight whether the significant volatility introduced by crypto is adequately compensated by higher returns, helping investors assess if it meaningfully enhances overall portfolio efficiency.

A number of well regarded fund managers and institutions are now performing this analysis. We compiled a round-up of the latest research to help investors understand the goldilocks level of crypto exposure within a traditional portfolio.

Blackrock

In December 2024, Blackrock issued guidance on how to size an exposure to Bitcoin within a multi-asset portfolio.  Applying their analysis to a traditional 60/40 stocks and bonds portfolio, they concluded that a 1-2% allocation was a “reasonable range” for Bitcoin exposure.

Their rationale? This exposure level gives Bitcoin a similar share of risk as the “Magnificent 7” stocks — Alphabet (Google), Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. In essence, they view a small Bitcoin allocation as comparable to the effect of adding a large-cap tech stock to a portfolio.

VanEck

For many investors, Bitcoin is only part of the picture, with Ether (ETH) — the native token of the Ethereum platform — becoming the next most popular crypto allocation. In November 2024, asset manager VanEck released a report analysing the impact of adding both Bitcoin and Ether to a traditional 60/40 portfolio. Their findings were that a combined allocation of 3% Bitcoin and 3% Ether (6% total) produced the best risk-adjusted returns for the portfolio, taking the Sharpe ratio from 0.78 to 1.44.

Bitwise

In August 2024, Morningstar interviewed Matt Hougan, Chief Investment Officer at Bitwise Asset Management, on optimal allocations (listen to the podcast here). Bitwise research, published in August 2023, looked at how adding 2.5% Bitcoin exposure to a 60/40 portfolio from January 1, 2014, to June 30, 2023 would have performed. The results were striking: cumulative returns increased from 64.34% to 101.57%.

A notable finding from the study was that the addition of Bitcoin did not significantly change the portfolio’s volatility or maximum drawdown (the largest drop from peak to trough before recovery). This suggests that modest crypto exposure can boost returns without dramatically increasing risk, likely due in part to the return profile of crypto and in part due to the fact that crypto serves as a diversifier in a portfolio.

Morningstar

Morningstar has also conducted its own analysis on the optimal level of exposure to Bitcoin. In August 2023 they published research that showed that the Sharpe ratio of a 60/40 portfolio increased as Bitcoin exposure grew - but only up to a point. The Sharpe ratio peaked at a 5% allocation to Bitcoin. Morningstar's analysis suggests that exposure beyond 5% starts to deliver diminishing risk adjusted returns.

Hashdex asset management

In June 2023, Marcelo Sampaio, the CEO and Co-Founder of Hashdex, a digital asset manager with USD$1.4b of assets under management penned an article for Pensions&Investments where he made the case for a 5% allocation to crypto. Instead of focusing on Bitcoin and Ethereum alone, Hashdex used the Nasdaq Crypto Index (NCI), which offers broader exposure to a range of cryptocurrencies including Bitcoin, Ether, Solana, Ripple, Cardano, Chainlink, Avalanche, Litecoin, Polygon and Uniswap.

Their analysis corroborated the findings of other analysis, in that a 5% exposure to crypto would optimise the risk-adjusted return of the portfolio.

What Does It All Mean?

If you're considering adding Bitcoin or Ether to your portfolio, recent research suggests a 1-5% allocation could optimise risk-adjusted returns. But what about venturing beyond the two most well-known cryptocurrencies? How might an allocation to assets like Solana, Sui, or Pepe shape your portfolio? Or perhaps exposure to a small-caps or thematic index? In our next article, we’ll explore how a custom crypto index could impact the risk-adjusted returns of a traditional 60/40 portfolio to answer these questions.

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