Bitcoin ETFs in Standard Multi-Asset Portfolios – QuantPedia

Understanding how Bitcoin-related devices can match into conventional portfolios is more and more related for traders. Some risk-averse traders don’t like to carry cryptocurrencies of their portfolios strategically; nonetheless, they could be open to investing in crypto-linked belongings on a tactical degree. On this context, our purpose is to discover how we are able to present short-term Bitcoin publicity whereas contributing to total portfolio steadiness and potential draw back safety.

Fundamental technique – 10-day excessive Bitcoin technique

The ten-day excessive technique for Bitcoin is a momentum-based buying and selling method that assumes belongings reaching new native highs are more likely to proceed their short-term development. The technique works as follows:

Our earlier Quantpedia analysis exhibits {that a} 10-day lookback window supplies efficient steadiness for momentum methods in Bitcoin. In Revisiting Development-Following and Imply-Reversion Methods in Bitcoin, shorter home windows corresponding to 10 days delivered stronger and extra strong risk-adjusted returns than longer horizons. Furthermore, as highlighted in How one can Profitably Commerce Bitcoin’s In a single day Periods, Bitcoin’s conduct differs throughout intraday and in a single day cycles; a 10-day window naturally incorporates a number of such cycles, smoothing out session-specific anomalies whereas remaining attentive to fast-changing market dynamics.

Getting into a place at a 10-day excessive is advantageous for a trend-following method as a result of it builds on current momentum. When Bitcoin (ETF) breaks via a short-term native most, it typically attracts extra shopping for curiosity and indicators the continuation of the development. A ten-day window is brief sufficient to seize new strikes shortly whereas nonetheless lengthy sufficient to filter out random noise, making it an efficient steadiness for figuring out significant value momentum.

Information & belongings

We primarily based our evaluation on day by day shut information from January 2018 via Could 30, 2025, specializing in 4 consultant exchange-traded funds.

BITO serves as an ETF automobile for Bitcoin publicity via regulated futures, making it one of the crucial accessible devices for traders searching for crypto allocation in conventional markets. For the interval from 2018 till BITO’s launch in 2021, we synthetically reconstructed its historic efficiency utilizing Bitcoin futures, as there have been no U.S.-listed ETFs or equally standardized belongings obtainable. We intentionally restricted the historic window previous to 2018 as a result of Bitcoin buying and selling was largely confined to identify exchanges that suffered from fragmented liquidity, restricted regulatory oversight, excessive volatility, and notable counterparty dangers. These circumstances lowered the reliability and sensible relevance of empirical outcomes for institutional-style portfolio building, making earlier information much less appropriate for (strong) backtesting. In spring 2024, quite a few new Bitcoin spot ETFs appeared, corresponding to IBIT, FBTC, or GBTC. Now, it’s straightforward to entry the spot Bitcoin market; nonetheless, for our historic evaluation, we use the futures and futures ETF because it supplies an extended historic window over which we are able to run our exams.

Amongst different ETFs we use: GLD tracks the worth of gold and represents the normal safe-haven asset in occasions of market stress. IEF holds intermediate-term U.S. Treasury bonds, a traditional fixed-income part typically related to the defensive, risk-off facet of portfolios. Lastly, SPY mirrors the S&P 500 index and acts as a broad proxy for U.S. equities.

Benchmarks

To judge the potential contribution of those belongings to a diversified portfolio, we aimed to assemble an in-sample, Sharpe ratio–optimized portfolio with fastened allocations. This method allowed us to determine portfolios that maximize anticipated return per unit of volatility throughout the pattern interval, offering a transparent benchmark for the way Bitcoin publicity through BITO interacts with conventional belongings. Utilizing the Sharpe ratio because the optimization criterion ensures that each threat and return are thought of, highlighting mixtures which are environment friendly from a risk-adjusted perspective.

Setting up a Markowitz-style portfolio with out BITO ends in an allocation of roughly 64.31% in GLD and 35.69% in SPY. When a hard and fast allocation to BITO is included, the optimum portfolio shifts to roughly 60% GLD, 30% SPY, and 10% BITO.

Desk 1: Efficiency metrics of Markowitz Sharpe-ratio optimized portfolios.

PORTFOLIO
CAR p.a.
VOL p.a.
SHARPE

Markowitz optimum with BITO
17.06%
13.44%
1.27

Markowitz optimum with out BITO
13.69%
12.40%
1.10

Bonds, represented right here by IEF, proved much less enticing for inclusion in the course of the interval below examine. Excessive inflationary pressures between 2022 and 2024 led to weak bond efficiency, limiting their capability to stabilize the portfolio. From a Sharpe ratio perspective, allocating to IEF contributed little to risk-adjusted returns, which is why the optimum portfolio excluded it completely.

In distinction, gold skilled a major bull market throughout the identical interval. This robust efficiency elevated the anticipated return contribution of gold, boosting the portfolio’s Sharpe ratio. In consequence, gold naturally turned the dominant part of the optimized allocation, alongside SPY, to maximise anticipated return per unit of volatility.

It is very important be aware that establishing the portfolio primarily based on in-sample Sharpe ratio optimization is certainly not the perfect allocation for future intervals. Market circumstances, volatility, and asset correlations can change, which means that allocations derived from these historic information usually are not essentially consultant of long-term optimum allocations, as the particular circumstances that favored gold, restricted bond efficiency, and formed correlations amongst belongings throughout this era could not recur sooner or later. This portfolio ought to subsequently be used primarily as a comparative benchmark for the pattern interval fairly than a definitive information for long-term allocation.

Bitcoin publicity through BITO is proscribed to roughly 10% of the portfolio as a result of, regardless of its excessive anticipated returns, it additionally displays substantial volatility. Even a modest allocation can considerably improve total portfolio threat. From a Sharpe ratio perspective, the ten% allocation represents a steadiness between capturing potential upside and avoiding extreme threat. In actual fact, for some traders or below barely completely different market circumstances, even this 10% might be thought of aggressive, highlighting the significance of fastidiously assessing threat tolerance when incorporating extremely risky belongings like BITO.

As an extra level of comparability, we are going to primarily use a easy 60/40 allocation between SPY and IEF as a reference benchmark. This conventional combine displays a balanced method between equities and bonds, capturing progress potential whereas offering stability via fixed-income publicity. Utilizing this benchmark permits us to guage the incremental impression of together with BITO or different deviations from an easy, traditionally grounded allocation.

Desk 2: Efficiency metrics of 60% SPY & 40% IEF portfolio.

PORTFOLIO
CAR p.a.
VOL p.a.
SHARPE

60% SPY & 40% IEF
8.54%
11.96%
0.71

Threat-on & threat off

Reasonably than relying solely on fastened portfolio weights, we wish to shift towards a two-regime allocation framework that distinguishes between “risk-on” and “risk-off” environments. In a risk-on regime, market circumstances for cryptocurrencies are favorable, and traders are extra prepared to take publicity to higher-volatility belongings corresponding to Bitcoin. Conversely, in a risk-off regime, threat urge for food declines, and capital tends to move into extra defensive or lower-volatility belongings. To operationalize this regime shift, we are going to use a 10-day excessive indicator for BITO. The technique works as follows:

Right here, we deal with our first portfolio—the risk-on portfolio. This portfolio follows a trend-following technique, aiming to capitalize on upward actions in BITO. The method is to take care of a protracted place so long as the asset continues to exhibit a constructive development, thereby capturing potential good points whereas the market stays favorable. The danger-on portfolio is absolutely fastened, with fixed asset weights all through the interval.

The risk-off portfolio is a defensive portfolio, sustaining fastened asset weights all through the interval.

First iteration – From benchmark to BITO allocations

If we focus solely on BITO and disrespect different belongings, we are able to take a look at the effectiveness of our 10-day excessive technique. Following the method described above, the risk-on method implies allocating 100% of the portfolio to BITO, whereas within the risk-off regime, the portfolio stays completely in money (with 0% yield, for the simplicity).

Desk 3: Efficiency metrics of 100% BITO for 10-day excessive portfolio.

PORTFOLIOCAR p.a.VOL p.a.SHARPE100% BITO 10-day high23.23percent11.96percent0.77

The backtest outcomes counsel that this technique is comparatively dependable, which supplies a foundation for establishing a pair of portfolios that may be alternated relying on market circumstances. We take as a place to begin one of many benchmark allocations launched earlier, the 60% SPY and 40% IEF portfolio, and deal with it as our risk-off portfolio. To create the corresponding risk-on portfolio, we reallocate 10 p.c of the full weight to BITO, lowering the SPY and IEF positions proportionally. This adjustment ends in a composition of 54% SPY, 36% IEF, and 10% BITO. Outcomes of this method are:

Desk 4: Efficiency metrics of risk-on, risk-off, benchmark and 10-day excessive sign technique portfolios.

PORTFOLIO
CAR p.a.
VOL p.a.
SHARPE

Benchmark (60% SPY, 40% IEF)
8.54%
11.96%
0.71

10-day excessive sign technique (risk-on/off swap)
10.54%
12.50%
0.84

Threat-on (54% SPY, 36% IEF, 10% BITO)
12.44%
13.35%
0.93 

Threat-off (60% SPY, 40% IEF)
8.54%
11.96%
0.71

In comparison with the 60/40 benchmark, the 10-day excessive technique improved efficiency each in absolute and risk-adjusted phrases. The Sharpe ratio rose from 0.71 to 0.84, reflecting increased returns with solely a modest improve in volatility. Having the Bitcoin entire time (Threat-on) provided increased efficiency and Sharpe ratio; alternatively, not all traders are comfy with strategic allocation for cryptocurrencies, and tactical switching may be higher on this case.

Second iteration – From IEF to GLD

The benchmark portfolio of 60% SPY and 40% IEF was not notably properly suited to the noticed interval, as its efficiency was comparatively weak. This was pushed largely by the underperformance of bonds, which restricted the general risk-adjusted return of the portfolio. It could subsequently be affordable to reallocate a portion of the benchmark into different belongings. In our case, we introduce a ten p.c allocation to GLD, which supplies diversification advantages and higher aligns with the robust efficiency of gold throughout this era. Constructing on this adjustment, we use the revised benchmark with a ten p.c allocation to GLD because the risk-off portfolio and modify the risk-on portfolio in an analogous method.

This adjustment ends in a set of newly outlined portfolios, every reflecting a distinct regime and allocation construction. By introducing GLD into the benchmark and making use of the risk-on/risk-off framework, we get hold of the next portfolios with their respective efficiency metrics:

Desk 5: Efficiency metrics of risk-on, risk-off, benchmark and 10-day excessive sign technique portfolios.

PORTFOLIO
CAR p.a.
VOL p.a.
SHARPE

Benchmark (54% SPY, 36% IEF, 10% GLD)
9.12%
11.13%
0.82

10-day excessive sign technique (risk-on/off swap)
11.15%
11.70%
0.95

Threat-on (48% SPY, 32% IEF, 10% GLD, 10% BITO)
13.03%
12.66%
1.03 

Threat-off (54% SPY, 36% IEF, 10% GLD)
9.12%
11.13%
0.82

Relative to the revised benchmark, the 10-day excessive technique achieved stronger outcomes, with the Sharpe ratio bettering from 0.82 to 0.95. As soon as once more, the risk-on portfolio with the strategic allocation to BTC carried out one of the best, reaching a Sharpe ratio above 1. Nonetheless, the lively 10-day excessive technique that switched between risk-on and risk-off portfolios improved so much, too.

Third iteration – Optimum portfolio

Up so far, the outcomes have been derived instantly from our benchmark portfolios, with solely minor changes utilized. The subsequent step entails optimization, as we’ve thus far taken a comparatively conservative method and now intention to additional enhance the efficiency metrics. By fine-tuning allocations (to some extent), it’s doable to assemble a portfolio with considerably higher risk-adjusted returns. These outcomes have been derived as a direct results of earlier optimisation makes an attempt offered in part about benchmarks.

It is very important embrace a disclaimer: these outcomes are particular to the circumstances noticed in our pattern interval. Specifically, they profit from a state of affairs during which gold considerably outperformed bonds, and the technique could also be barely over-optimized for this surroundings. Due to this fact, these optimized allocations shouldn’t be interpreted as universally optimum or assured to carry out equally in several market circumstances.

The optimum portfolio (with rounded allocation share) has following construction:

The portfolio constructed with these weights displays the next fairness curve over the pattern interval, reflecting the cumulative efficiency of the allocations throughout risk-on and risk-off regimes. The numerical traits of the portfolio are summarized within the desk under, together with annualized return, volatility, and Sharpe ratio, offering a concise overview of its risk-adjusted efficiency.

Right here, as a benchmark, we used the optimized model of a nearly-Markowitz-optimal portfolio, containing 70 p.c GLD and 30 p.c SPY.

Desk 6: Efficiency metrics of risk-on, risk-off, benchmark and 10-day excessive sign technique portfolios.

PORTFOLIO
CAR p.a.
VOL p.a.
SHARPE

Benchmark (30% SPY, 70% GLD)
13.62%
12.42%
1.10

10-day excessive sign technique (risk-on/off swap)
18.72%
14.10%
1.33

Threat-on (32% SPY, 48% GLD, 20% BITO)
20.41%
17.51%
1.17

Threat-off (30% SPY, 70% GLD)
13.62%
12.42%
1.10

What can we observe? For the nearly-optimal portfolios, the lively technique that switches between risk-on and risk-off portfolios achieves one of the best Sharpe ratio with enticing efficiency. It’s even beating the optimum Markowitz benchmark from Desk 1. Nonetheless, we should stress as soon as once more that that is the setup fitted to historical past and doesn’t essentially imply one of the best method for the subsequent 5-10 years.

Conclusion

Bitcoin, accessed through BITO (or newer spot ETFs), can function a useful gizmo for diversifying a comparatively conservative portfolio. By incorporating tactical publicity to Bitcoin primarily based on the 10-day excessive sign, traders can probably seize upside throughout favorable market circumstances whereas conserving the general threat profile reasonable.

Along with Bitcoin, gold has confirmed to be an efficient different asset over the pattern interval, largely resulting from its robust bull market efficiency between 2018 and 2024. Nonetheless, it is very important be aware that this historic outperformance doesn’t assure comparable outcomes sooner or later, and the particular circumstances that favored gold could not recur.

A sensible method, subsequently, is to regulate the normal 60/40 equity-bond portfolio to incorporate a larger allocation to actual belongings corresponding to gold, whereas tactically allocating a portion to Bitcoin when indicators point out favorable circumstances. This methodology permits for modest incremental returns whereas sustaining the conservative traits of the bottom portfolio.

General, mixing conventional belongings with belongings like gold and tactical publicity to Bitcoin demonstrates a structured approach to improve risk-adjusted returns. Whereas the technique seems efficient below the noticed circumstances, it stays tailor-made to the historic interval studied and ought to be utilized cautiously in different market environments.

Writer: David Belobrad, Junior Quant Analyst, Quantpedia

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