The Modern Portfolio - The Case for Allocating to Bitcoin

New Money: Issue #5

NEW MONEY is a recap of the week in itcoin. Everything you need to know, right to the point. New Money, is published by Adam Pokornicky of DAIM Digital, a Registered Investment Advisor for itcoin and Digital Assets. Twitter: @callmethebear

Bitcoin was the best performing asset over the past decade yet very few individuals have any exposure to it at all. At DAiM (Digital Asset Investment Management), we believe in Bitcoin’s emerging potential as a non-sovereign, hard capped fixed supply decentralized form of digital money and the ability for Digital Assets as a whole to improve the efficiency and accessibility of our global financial system.

We strongly advocate that every single individual should have at least 1% and up to 6% exposure to Bitcoin in their overall portfolio. Whether you believe in Bitcoin as a new form of money, as a hedge to unlimited printing of fiat currency, you like “blockchain technology” and its ability to create business models that democratize information and value in incredible new ways or you just want to have a little diversification in your 401k and make some extra money, the data is showing that having ZERO exposure to Bitcoin is not only irresponsible but becoming a financial risk.

Back in September of last year I wrote a research report titled “Get Off Zero: The Case for Bitcoin and Why a 1-6% Allocation Should Be Considered”. In it, I explained:

  1. what Bitcoin is

  2. how it started, 

  3. it's potential as a Store of Value and Global Money

  4. where we are in the technological adoption curve, 

  5. it's allocation and diversification benefits in a modern portfolio

  6. how to invest

In the section on portfolio allocation and diversification benefits I used data from the past 3 years through July 2019. Even then it was quite clear that portfolios that included Bitcoin performed better both outright and on a risk-adjusted basis than portfolios without. Given how much the world has changed over the past 9 months especially with the economy, stock market and price of Bitcoin all in decline, I decided it was time to rerun the numbers and share my findings.

The Case for Bitcoin

Let me first start off by pointing out how rare it is that an entirely new asset class is born. Yet, through a combination of cryptography, monetary theory, game theory, economics, and network theory, Bitcoin has emerged and developed an entire asset class of Digital Assets unlike any other. As Bitcoin and Digital Assets transform our global financial infrastructure and challenge Modern Monetary Theory (governments and central banks have a monopoly on printing unlimited amounts of money and making you poorer in the process), we believe Bitcoin offers one of the most exciting investment opportunities of the 21st century.

Consistent with Modern Portfolio Theory, we generally subscribe to the notion that the optimal return-to-risk ratio for a portfolio can be found on the efficient frontier. New asset classes are powerful because they offer a unique return stream that can provide a diversification benefit. Whether you have a positive, negative or undecided opinion of Bitcoin because you don’t understand it, we will model out out how Bitcoin, as a brand-new asset class can enhance strategic asset allocation and help investors build portfolios with higher risk-adjusted returns.

Model Portfolio

As a Registered Investment Advisor specializing in Bitcoin and Digital Assets, an emerging part of our business is working with traditional Financial Advisors and Wealth Managers so that they can use us as a regulated resource to begin allocating a portion of client assets to Bitcoin in a safe and secure way. Recently, a large wealth manager publicly shared the exact allocation of their Model portfolio(I removed their name bc I’m going to be trying to work with them as partners long term). It’s easy to run standardized 60/40 Equity/Bond Portfolios but given the detailed breakdown of holdings and asset allocations, I was excited to see what the data would show.

For the purpose of this exercise I am going to run their current “Model Portfolio” as is and then against a 1% and 3% allocation to Bitcoin from Nov. 2015 until Mar. 2020

Firm X “Model Portfolio”

These are the holdings and adjustments I’ve made for each portfolio.

Data Notes:
1. The portfolio analysis was run only to Nov 2015 due to lack of historical data available for Aristotle Small Cap Equity (ARSBX) and Griffin Institutional Access Real Est (GRIFX)
2. VanEck Vectors BDC Income ETF (BIZD) was used in place of “Private Credit”
3. S&P500 ETF Trust (SPY) was used in place of Parametric S&P500 due to lack of available data



Additional Backtesting (at what allocation to Bitcoin is the Optimal Portfolio?)

Key Findings:

Looking at the results above, it clearly demonstrates that portfolios containing an allocation to Bitcoin all performed better than the standard Firm X Model Portfolio, on both an absolute and risk-adjusted basis. The difference is actually staggering. For example: 

  • Adding a 1% allocation to Bitcoin to the Firm X Model Portfolio increased annual returns by 298 bps, improved the Sharpe Ratio by 84% while lowering market correlation.

  • Adding a 3% allocation to Bitcoin to the Firm X Model Portfolio increased annual returns by 851 bps, improved the Sharpe Ratio by 187% while lowering market correlation considerably

  • The best performing and most efficient portfolio included a 10% allocation to Bitcoin. Additionally, this portfolio had the least amount of market correlation. 

  • Both a 1% or 3% allocation to Bitcoin would offer a considerably lower standard deviation then the S&P average of 13.44% while offering returns of 7.03% and 12.56% vs 7.15% over the same time period

  • When you look at these generic multi-asset portfolios from Blackrock and Vanguard that are usually low fee staples of your 401k plans, the results look even more pathetic and outrageous

Given our understanding of portfolio theory, this is not all surprising. Since Bitcoin is uncorrelated with traditional assets over a multi-year basis, combining it with traditional model portfolios can enhance strategic asset allocation and help investors build portfolios with higher risk-adjusted returns. While it goes without saying that a 10% allocation to an incredibly risky new asset class is too large in a multi-asset portfolio even though you are compensated for the excess risk, it is our strong belief that having ZERO exposure to Bitcoin at this point is absolutely the wrong allocation as well.

Are You or Your Financial Advisor Being Irresponsible?

Disclaimer: First of all, I don’t know everyone’s situation and if you are in debt, have bills or not in a position to invest and take risk, please don’t be doing anything stupid like taking out a loan or using a credit card to invest in Bitcoin. If you want to talk about how to get to a place financially where its appropriate to add Bitcoin or how to earn Bitcoin for free, shoot me an email. Now that thats out of the way…..

The short answer is ABSO-FCKING-LUTELY YES. And you need to change this.

While investor interest in Bitcoin continues to grow around the world, access to Bitcoin through Financial Advisors/Wealth Managers and 401k plans is largely unavailable due to bureaucracy, infrastructure and woeful breach of fiduciary duty. Currently most financial advisors and wealth manages are not properly licensed to manage and advise on Bitcoin and Digital Assets and even if they are, they likely haven’t done the work to understand it or its benefits and will give some Bull Sh*t excuse and broker talk about why its too risky, why it’s someone else’s fault they can’t offer it or bunch of other nonsense about why its not a good idea.

This leaves most people with the choice of doing it themselves and sending funds to risky exchanges and/or self-direct options. While these options are certainly a good start, they tend to be harmful to investors, exploiting you through punitive setup and transaction fees, encouraging trading and promoting high risk shitcoins that you have no business investing in.

If you have a financial advisor and he/she/they HAS NOT recommended or even had a conversation with you about Bitcoin at least for basic portfolio diversification and risk-adjusted return purposes yet then they are doing you a major disservice. We should talk. Like right away. Shoot me an email, give me a call or connect me on the phone with your financial advisor and we’ll happily start the conversation with you and/or them to get you off ZERO and on the right path. Whatever you are doing, stop fcking around at this point. Like Seriously.


Yo yo yo … CA$H Money Trillionaires!!!!

I just cant stop laughing at this one….His face smh 🤦🏻‍♂️

Quarantining Self-Care

My hair was getting out of control and people were telling me I looked like the Geico caveman on zooms and hangouts so I decided to give myself a haircut this weekend. h/t to my partner Marlin for helping me. I’m shocked how it turned out.

Reality Check ✅

This couldn’t be more true. While social distance and quarantining sucks, I feel fortunate and privileged relative to many other people’s situation. Is anyone doing anything meaningful to help out people in your community who are struggling?

What I am Reading:

Must read:

This was widely shared across my network and was excellent reading. It opened with the argument that the failure of Coronavirus was a failure of basically all of our institutions:

“This monumental failure of institutional effectiveness will reverberate for the rest of the decade, but it’s not too early to ask why, and what we need to do about it. Many of us would like to pin the cause on one political party or another, on one government or another. But the harsh reality is that it all failed — no Western country, or state, or city was prepared — and despite hard work and often extraordinary sacrifice by many people within these institutions. So the problem runs deeper than your favorite political opponent or your home nation.

Best Podcasts of the Week:

The Breakdown: Why Money Is Losing Its Meaning, feat. Jared Dillian

NLW is joined by Jared Dillian, market analyst, contrarian, and editor of The Daily Dirt Nap. They discuss:

  • What ‘safe haven’ means in today’s climate

  • How Jared became a bitcoin believer after being a skeptic

  • Why in an MMT world, taxation policy will be driven by ideology not practicality

  • Why money is losing its meaning

TWIB (This Week in Bitcoin)

Bitcoin Twitter/Crypto Follow List:

I sincerely believe one of the most valuable things you can do for yourself is to curate a time tested list of reliable resources for news, education and current events. Finding individuals and sources that are objective, balanced and value added can be the difference between being aware and prepared for COVID-19 a month before everyone else or buying a bunch of orange magic internet money before other people have even heard of it. That being said, here are some of the most brilliant, helpful and resource heavy humans I follow on Twitter. I highly recommend giving many of these people a follow.

Big Picture:

Trading & Market Color

Next Week in New Money:

  • What is Money?

Recent Issues of New Money:

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