A data table showing monthly and annual percentage returns for Bitcoin from September 2014 to 2023, including monthly averages and a standout 150.1% return in 2017.

Bitcoin Portfolio: Backtest, Allocations and Analysis

ByOddmund Groette Bitcoin And Crypto Trading Strategies

For a long time, there has been debate about whether a classic investment portfolio should add cryptocurrencies. The debate gained traction when famous institutional investors secured a stake of their capital in Bitcoin. Should Bitcoin be a part of your portfolio? Let’s find out:

Yes, history shows Bitcoin should be a part of your investment portfolio. Our backtests show the importance of diversifying your investment portfolio. Bitcoin offers that with a low correlation to the market, providing superior returns on assets used for the same purpose and positively impacting portfolio metrics. However, there is no guarantee history will repeat itself.

How much crypto should be in your portfolio? This article investigates how adding Bitcoin to certain percentages in a classic portfolio impacts its metrics. We use a starting capital of $100,000. We use the ETF Vanguard Total Stock Mkt Idx Inv (VTSMX) as a proxy for equities. For bonds, we use the EFT Vanguard Total Bond Market Index Inv (VBMFX), and, of course, the BTC spot price.

Key Takeaways

  • Bitcoin improves diversified portfolio performance
  • Low correlation enhances portfolio diversification benefits
  • Small Bitcoin allocation boosts long-term returns
  • Annual rebalancing controls crypto portfolio risk
  • Monte Carlo simulations optimize Bitcoin allocation
  • Efficient frontier identifies optimal crypto weighting
  • Bitcoin increases Sharpe and Sortino ratios
  • Diversified portfolios benefit from crypto exposure

You might want to click here if you are looking for an investment strategy.

The good old 60-40 classic portfolio and Bitcoin

An infographic titled "Bitcoin Portfolio Backtest: Key Insights" comparing a classic 60/40 portfolio (equities/bonds) to portfolios including Bitcoin allocations, featuring Monte Carlo simulation results and rebalancing data.
This Bitcoin portfolio backtest demonstrates that adding just a 1% BTC allocation to a traditional 60/40 portfolio can increase the CAGR by 2% with a nearly identical Sharpe Ratio.

For decades, the 60% equities and 40% bonds distribution in the classic portfolio has been the investment choice for retirement, that is, for the conservative investor.

This composition uses stocks as a growth engine and softens market volatility with fixed income from bonds. Financial advisors place their clients’ assets in portfolios with risk tolerance profiles, time horizons, and defined financial goals.

To simplify our model in this article, we assume zero cash flows (there will be no income or capital outflow), no rebalancing, and we will not reinvest the generated dividends. Our benchmark will be the Vanguard 500 Index Investor (SP500).

What percentage of Bitcoin should be in the portfolio?

For our first case study and backtest, we use the aforementioned 60-40 classic portfolio, but we add 1% Bitcoin, which will come from the equity percentage. Due to limited Bitcoin market data, our analysis range is from January 2014 to March 2023.

Here are the statistics and performance metrics:

A data table showing Portfolio Performance (2014-2023) comparing a traditional 60/40 portfolio, a 59/40/1 Bitcoin allocation, and the Vanguard 500 Index, including CAGR, Max Drawdown, and Sharpe Ratio.
Our Bitcoin portfolio backtest reveals that adding just a 1% allocation to a traditional 60/40 strategy increased the inflation-adjusted CAGR from 2.62% to 4.86% while maintaining a comparable Sortino Ratio.

With a CAGR increase of over 2% versus the original portfolio, an almost identical Sharpe Ratio, and a slightly higher Sortino Ratio, the first thing we notice is a significant improvement in the performance of the portfolio model by adding only 1% BTC. The standard deviation was very close to the SP500 at 15.88%.

On the other hand, we cannot overlook the max drawdown, which is over 12 percentage points more than the 60-40 portfolio.

But why does the portfolio improve when adding Bitcoin? The answer is obvious: the percentage of BTC grew over time from an initial 1% to a final 12.34%, with a maximum of 24.58% in 2022.

Remember that in our case study, we decided not to rebalance the portfolio, and this is seen in the following chart:

A financial line chart on a logarithmic scale comparing the cumulative returns of a 100% Bitcoin portfolio, a 60/40 Equity/Bond portfolio, and a diversified 1% Bitcoin allocation from 2014 to 2026.
This Bitcoin portfolio backtest chart illustrates the massive performance gap between traditional assets and Bitcoin, showing how even a 1% allocation can significantly tilt the cumulative return curve upward over a decade.

Here are some interesting graphics of this model and our benchmark:

A clustered bar chart comparing annual returns from 2014 to 2023 for three portfolios: a classic 60/40 portfolio, a 59/40/1 Bitcoin allocation, and the Vanguard 500 Index.
This Bitcoin portfolio backtest comparison shows how a modest 1% BTC allocation frequently outperforms the traditional 60/40 model, particularly during high-growth years like 2017, 2020, and 2021.
A line graph titled "Portfolio Growth" comparing the growth of a $100,000 investment from 2014 to 2023 across three models: a traditional 60/40 portfolio, a 59/40/1 Bitcoin allocation, and the Vanguard 500 Index.
Our Bitcoin portfolio backtest shows that a 1% BTC allocation steadily outperformed a traditional 60/40 portfolio over the last decade, reaching a final balance of over $200,000 compared to approximately $164,000.
A financial line chart showing the historical drawdown percentages from 2014 to 2023 for three different investment models: a 60/40 portfolio, a 59/40/1 Bitcoin allocation, and the Vanguard 500 Index.
This Bitcoin portfolio backtest comparison illustrates that while a 1% BTC allocation increases the maximum drawdown to -36.50%, the portfolio behavior closely mimics traditional benchmarks during major market stress events.

Here are more details about the composition of our classic portfolio:

Equity market capitalization:

  • Large Cap: 72.26%
  • Mid-Cap: 19.39%
  • Small Cap: 8.35%

Fixed income credit quality:

  • AAA 71.14%
  • AA 2.93%
  • A 11.9%
  • BBB 14.04%

Should investors include Bitcoin in their portfolios?

Now, in order to reduce our exposure to Bitcoin, we have also applied annual rebalancing to the same portfolio model we used above. This is the results

A horizontal bar chart titled "Should investors include Bitcoin in their portfolios?" showing different levels of institutional and retail Bitcoin allocation strategies as of 2026.
Deciding on a Bitcoin portfolio allocation involves balancing growth potential against volatility; our 2026 analysis shows how different percentages impact the long-term Sharpe Ratio of a diversified investment strategy.

The return is still higher than the classic 60/40 portfolio, notably improving the Sharpe and Sortino ratios. Our maximum drawdown and standard deviation are also lower than our benchmark (S&P 500).

A line graph titled "Portfolio Growth" comparing the growth of a $100,000 investment from 2014 to 2023 across three models: a traditional 60/40 portfolio, a 59/40/1 Bitcoin allocation, and the Vanguard 500 Index.
Our Bitcoin portfolio backtest shows that a 1% BTC allocation steadily outperformed a traditional 60/40 portfolio over the last decade, reaching a final balance of over $200,000 compared to approximately $164,000.

Portfolio Optimization with Bitcoin

It’s clear that not all investors are the same, and there is an appropriate risk model for each one. There are those who are “all in” and those who are more conservative, but we cannot ignore the overall positive impact that BTC can have on an investment portfolio.

Some investors may not tolerate certain levels of drawdown or deviation in their investments, and to objectively assess these aspects, we can perform a strategy optimization for our model. To do this, we will maximize the Sharpe ratio using Monte Carlo simulation and monthly rebalancing using the same financial assets we used earlier in the article.

Monte Carlo simulation and Bitcoin (in the portfolio)

Portfolio optimization using Monte Carlo is a method that uses simulations based on random numbers to aid in investment decision-making. Using this method, multiple random scenarios of market behavior are generated and used to simulate the performance of different asset combinations in a portfolio.

Then, the profitability and risk of each asset combination are evaluated to identify the one with the best balance between risk and return. By using Monte Carlo simulations, many more factors and variables can be considered in portfolio optimization.

A Monte Carlo simulation chart showing 1,000 potential future price paths for a Bitcoin portfolio, with percentile distribution and a median projected outcome.
This Bitcoin portfolio backtest uses Monte Carlo simulations to model 1,000 possible risk scenarios, helping investors understand the range of potential outcomes for a BTC-inclusive allocation over the next decade.
A scatter plot showing the Resampled Efficient Frontier (2014–2023), mapping Expected Return against Standard Deviation for Bitcoin, the Vanguard 500 Index, and the Maximum Sharpe Ratio portfolio.
This Bitcoin portfolio backtest uses a resampled efficient frontier to identify the optimal balance between risk and reward, highlighting that the Maximum Sharpe Ratio often requires a specific blend of BTC and traditional equities.

Efficient Frontier of the portfolio when including Bitcoin

What percentage of Bitcoin (crypto) should be in the portfolio?

The efficient frontier is the set of optimal portfolios that offer the highest expected return for a defined level of risk or the lowest risk for a given level of expected return.

Portfolios that lie below the efficient frontier are sub-optimal because they do not provide enough return for the level of risk.

Portfolios that cluster to the right of the efficient frontier are sub-optimal because they have a higher level of risk for the defined rate of return.

The asset allocation closest to the efficient frontier is as follows:

  • VTSMX 56.59%.
  • VBMFX 20.75%
  • BTC 22.66 %

Here is the equity curve:

A line graph titled "Portfolio Growth" comparing the cumulative performance of a Maximum Sharpe Ratio portfolio against the Vanguard 500 Index from 2014 to 2023.
This Bitcoin portfolio backtest highlights the massive growth potential of an optimized Maximum Sharpe Ratio strategy, which reached a terminal balance of over $60,000 from a $10,000 start, significantly outperforming the Vanguard 500.

Maintaining a diversified portfolio is key in the long term, and Bitcoin still gives us that edge over many assets in the traditional market.

Here is a correlation table including the gold price:

A financial table showing asset correlations between the Vanguard Total Stock Market Index (VTSMX), Vanguard Total Bond Market Index (VBMFX), Bitcoin (^BTC), and SPDR Gold Shares (GLD) from 2014 to 2022.
This Bitcoin portfolio backtest highlights the diversification benefit of BTC, showing a low correlation of 0.39 with the total stock market and 0.26 with bonds, which helps reduce overall portfolio volatility.

As you can see, Bitcoin and gold offer low correlation to stocks, especially bonds.

Portfolio diversification with Bitcoin – do you need it in your portfolio?

In general, it has been observed that Bitcoin has a very low or even negative correlation with classic financial assets such as stocks, bonds, and commodities. This means that when the prices of these assets rise, the price of Bitcoin does not necessarily follow suit and vice versa.

For example, during the COVID-19 pandemic in 2020, stock and commodity prices fell drastically, while the price of Bitcoin remained relatively stable and even rose at times. This suggests that Bitcoin could have a role as a safe-haven asset in times of market uncertainty.

However, it is important to note that Bitcoin’s correlation with classic financial assets can be volatile and may change over time. The only sure thing about correlation is that it varies over time! And often correlations increase when you need it the most.

Additionally, since Bitcoin is a relatively new asset class and is not yet widely accepted as a legitimate asset by many investors, its relationship with classic financial assets could change as the market evolves.

In 2020, CoinShares, an institutional cryptocurrency investment management firm, published an analysis on the role of Bitcoin in an investment portfolio. The study called Bitcoin’s role in an investment portfolio, shows the effect of including Bitcoin in an investment portfolio.

In the analysis, CoinShares uses a 4% allocation to Bitcoin in a traditional portfolio and compares it to other diversifying assets. Their conclusion was this:

Our analysis highlights that Bitcoin not only enhances returns but also increases diversification, regardless of when an investor decides to invest.

In 2021, Ecoinometrics published an analysis in its newsletter on the 3rd of February 2021 of the impact of including Bitcoin in an investment portfolio with various percentages of assets from the S&P500 index and gold. Among the premises of the analysis, Ecoinometrics did not include bonds in the portfolio but varied the percentages of Bitcoin, S&P500, and gold to illustrate the impact of including Bitcoin.

Goldman Sachs Group Inc highlighted Bitcoin as the best-performing asset in terms of absolute and risk-adjusted returns in early 2023. Then came the banking crisis, and the largest cryptocurrency rose to its highest price in ten months. Jamie Douglas Coutts, Senior Market Structure Analyst at Bloomberg Intelligence, points out that Bitcoin has just recorded its second-best quarter in a decade: a strong first quarter typically translates into higher prices later in the year.

Should Bitcoin be part of your portfolio – conclusion

Should crypto be part of your portfolio? We have seen the importance of diversifying an investment portfolio. Bitcoin offers exactly that with a low correlation to the market, providing superior returns on assets used for the same purpose and positively impacting portfolio metrics.

Each investment model must carefully study its time horizon, expected return, and risk profile. With these aspects well defined, determine the percentage of Bitcoin to include in its investment plan. Also, the past might never replicate the future.

Sources:

  • Bitcoin merece algo de espacio en tu portafolio – bloomberglinea.com
  • Conoce las estrategias para la inclusión de bitcoin en un portafolio de inversión – criptonoticias.com
  • Qué beneficios tiene la inclusión de bitcoin en portafolios de inversión tradicionales – criptonoticias.com
  • Bitcoin’s role in an investment portfolio – coinshares.com
  • Ecoinometrics – February 03, 2021 – ecoinometrics.substack.com
  • Graphics and Statistics – portfoliovisualizer.com

FAQ:

How much of my portfolio should be allocated to Bitcoin?

The allocation of Bitcoin in a portfolio depends on individual risk tolerance, investment goals, and time horizon. The article provides a detailed analysis of different scenarios, including a 1% allocation and an optimized allocation based on Monte Carlo simulations. Investors should carefully consider their financial objectives before deciding on a specific percentage.

What is the impact of adding 1% Bitcoin to a classic 60-40 portfolio?

Adding 1% Bitcoin to a classic 60-40 portfolio can significantly improve the portfolio’s performance. The backtest results show an increase in Compound Annual Growth Rate (CAGR) by over 2%, an almost identical Sharpe Ratio, and a slightly higher Sortino Ratio. The portfolio’s standard deviation remains close to the S&P 500, but the maximum drawdown increases.

How does Bitcoin affect the performance of a diversified portfolio with annual rebalancing?

Including Bitcoin in a diversified portfolio with annual rebalancing can enhance returns and improve risk-adjusted metrics. The article presents results showing higher returns than a classic 60-40 portfolio, along with improved Sharpe and Sortino ratios. The maximum drawdown and standard deviation are also lower than the benchmark (S&P 500).

I’ve got an Msc from Heriot-Watt University, Edinburgh (1996), in addition a to a business administration degree the Norwegian School of Management (BI – 1994). Did my mandatory military service in between.

After university, I worked two years as an auditor (1996-1998).

I co-founded Aksjeforum.com in 1998/99 - one of the first websites about trading and investing in Norway. It was later acquired by Digi.no in 2001.

I have written 4 books about trading (in Norwegian). One of them has sold 30,000 copies, a record for a financial book in Norway.

From 2001 until 2018 full-time independent prop trader (Series 7 in 2001) and investor.

2018-today: Investor, writer, analyst.

Similar Posts