BlackRock Recommends a 2% Bitcoin Allocation for Diversification

BlackRock, the world’s largest asset manager, has proposed including Bitcoin in traditional 60/40 investment portfolios, recommending a 1% to 2% allocation. 

This recommendation, outlined in a report titled "Sizing Bitcoin in Portfolios" by the BlackRock Investment Institute, highlights a shift in the asset manager's stance on Bitcoin, which has gained significant attention as it crossed the $100,000 threshold.

The report positions Bitcoin as a potential diversification tool, alongside major companies like Nvidia, Amazon, and Apple. 

Unlike these firms, which generate revenue through products and services, Bitcoin functions primarily as a store of value. 

If 1% of BlackRock’s $5.2 trillion equity holdings were allocated to Bitcoin, it would translate into $50 billion of new demand for the digital asset. 

Over the past year, Bitcoin’s price has surged by over 130%, outpacing the S&P 500’s 32% rise during the same period.

Led by Samara Cohen, Chief Investment Officer of ETF and Index Investments, the report compares Bitcoin’s risk profile to the "Magnificent 7" tech giants, which account for a significant portion of the S&P 500’s market capitalization. 

“[Those stocks] provide an example of single portfolio holdings that account for a comparatively large share of portfolio risk,” the report states. 

Bitcoin’s $2 trillion market capitalization and low correlation with traditional markets underscore its diversification potential.

The report notes a notable shift in Bitcoin’s market behavior since mid-2023. 

Previously correlated with technology stocks, Bitcoin has begun to diverge due to factors such as geopolitical tensions, financial system fragmentation, and declining trust in traditional banking. 

Cohen emphasizes the framework for using Bitcoin to enhance diversification while addressing its price volatility, which has historically included steep declines.

The analysis also explores Bitcoin’s impact on portfolio risk. A 1% allocation adds 2% to overall risk, while a 2% allocation increases risk to 5%. 

Larger allocations lead to disproportionately higher risk contributions, with a 4% allocation accounting for 14% of overall risk. Given this, the report recommends capping allocations at 2%.

BlackRock anticipates that Bitcoin’s characteristics may evolve as the asset matures, potentially taking on a role similar to gold in investment portfolios. This would involve more tactical uses, such as hedging against specific risks.

The firm’s growing involvement in Bitcoin reflects broader market trends. 

In 2022, BlackRock partnered with Coinbase to provide institutional Bitcoin access and now manages the iShares Bitcoin Trust (IBIT), the world’s largest Bitcoin ETF with $50.8 billion in assets. 

As Bitcoin adoption expands, BlackRock continues to explore its potential as a diversification tool while balancing its inherent risks.