High Bitcoin volatility can enhance portfolio returns with smaller allocations, but poses emotional challenges.

From Investing.com
September 21, 2024 4:00 am:

Traditional investors have long been wary of Bitcoin’s extreme price swings, with its 76.1% average monthly volatility. However, BCA Research argues that this volatility can enhance Bitcoin’s value in a diversified portfolio, as high-volatility assets like Bitcoin allow for greater returns with smaller allocations compared to low-volatility assets.

When comparing Bitcoin to a hypothetical asset called Boringcoin, with the same risk-adjusted return profile but lower 5.4% volatility, Boringcoin would require a larger capital allocation to achieve the same portfolio returns as Bitcoin. Bitcoin’s high volatility enables more efficient portfolio construction and better risk-adjusted returns.

In practice, a portfolio targeting 10% annual volatility would only require an 8% allocation to Bitcoin to achieve the ideal balance of risk and return, compared to a larger allocation needed for Boringcoin. Bitcoin’s volatility proves to be a tool for maximizing capital efficiency in a well-constructed portfolio, delivering strong returns with a smaller allocation.

BCA Research acknowledges the challenges of managing a volatile asset like Bitcoin in the real world, where human emotions can complicate investment decisions. While Bitcoin’s volatility can offer better returns in theory, investors may struggle with the emotional toll of its sharp ups and downs, making it harder to stick with high-volatility strategies during big drops.

Despite Bitcoin’s potential for higher long-term returns, the emotional burden of holding onto it through steep drawdowns could lead to premature selling. Boringcoin, with its smoother trajectory and lower volatility, would be easier to sell to conservative investors compared to Bitcoin’s rollercoaster-like price chart.

Read more at Investing.com: Is high Bitcoin volatility a feature and not a bug? By Investing.com