The Strategic Role of Bitcoin in Asset Allocation: Implications for Risk Management and Long-Term Investment Performance

Abstract

This study explores the strategic integration of Bitcoin into traditional investment portfolios, analyzing its implications for risk management and long-term investment performance. As Bitcoin matures into a semi-mainstream asset, institutional interest and regulatory clarity have expanded its appeal beyond speculative investing. The research evaluates whether Bitcoin enhances portfolio efficiency, serves as a hedge or diversifier, and improves risk-adjusted returns. A quantitative methodology was adopted, incorporating historical data from 2016 to 2024, covering Bitcoin, equities (S&P 500), bonds, and gold. Metrics such as mean returns, volatility, Sharpe ratio, Sortino ratio, maximum drawdown, and correlation matrices were used to assess the asset’s contribution. The results indicate that including Bitcoin in modest allocations (2–4%) improved Sharpe and Sortino ratios, while increasing cumulative returns without significantly inflating risk. However, higher allocations (6% and above) led to heightened volatility and reduced stability. Correlation analysis revealed that Bitcoin maintains low correlation with traditional assets, supporting its role as a partial diversifier. Furthermore, regression models demonstrated positive alpha, indicating performance beyond traditional market exposure. While Bitcoin showed promise as a complementary asset, its elevated volatility and regime-dependent behavior underscore the importance of disciplined allocation, regular rebalancing, and robust risk oversight. The findings suggest that Bitcoin can enhance portfolio resilience, but only within a structured risk management framework.

Keywords: Allocation, Bitcoin, Diversification, Portfolio, Risk management, Volatility.