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Timely and concise insights on Bitcoin & Cryptoasset Markets
• Growing Mainstream Adoption of Digital Assets: Institutional investors and major asset managers are increasingly incorporating digital assets like Bitcoin into their portfolios, as evidenced by recent filings and the launch of Bitcoin ETFs in the U.S. Despite their current small market share, these investments reflect a broader trend towards mainstream acceptance
• Impact on Portfolio Performance: The inclusion of Bitcoin in portfolio optimizations, using strategies such as Maximum Sharpe Ratio and Risk Parity, has shown to improve the risk-adjusted returns compared to traditional portfolios. Portfolios optimized with Bitcoin not only offer higher returns for the additional risk taken but also present a wider range of efficient risk-return combinations
• Optimal Allocation Recommendations: Empirical studies suggest that even a small allocation to digital assets, specifically between 2% to 3% in broader asset mixes and up to 4% to 6% in more focused digital asset portfolios, significantly enhances portfolio performance without adversely impacting overall risk profiles
Gradually, then suddenly, as they say, digital assets are becoming mainstream.
The biggest asset managers in the world have launched spot Bitcoin ETFs in the US this year and adoption among institutional investors is rising rapidly.
Major financial institutions like Franklin Templeton themselves have just recently disclosed significant investments into Bitcoin ETFs via their latest 13F filings.
Institutional hedge funds that manage money for Ivy League university endowments have disclosed multi-million Dollar holdings. Stanford university’s Blyth Fund has recently disclosed that they hold around 7% allocation in Bitcoin ETFs.
Nonetheless, at the time of writing, US Bitcoin ETFs only account for approximately 0.6% of the overall size of the US ETF market based on data provided by ICI.
In Europe, Bitcoin ETPs also only comprise a tiny fraction of the 11 trn EUR UCITS market of only 0.05%, according to our calculations based on Bloomberg data.
In general, we expect the relative size of digital assets to increase further as even small allocations to digital assets are bound to increase portfolio risk-adjusted returns significantly as demonstrated in our latest deep dive on Bitcoin.
But what is the optimal allocation to Bitcoin and digital assets in general?
What is the optimal allocation to digital assets?
Most empirical portfolio studies usually look at how a classical 60/40 portfolio comprising of 60% allocation in stocks and 40% allocation in bonds responds to a gradual increase in digital asset allocation.
In our previous digital asset study, we did a similar exercise by investigating the effect of increases in digital asset allocation on overall portfolio risk and return metrics.
Since digital assets generally exhibit a higher risk-adjusted return (“Sharpe Ratio”) than other traditional asset classes, a marginal increase in allocation usually leads to an increase in overall portfolio risk-adjusted returns.
However, most institutional asset managers don’t employ a 60/40 portfolio in the first place because of high portfolio volatility and the dominance of the equity allocation for the whole portfolio’s risk-return profile.
In fact, most institutional asset managers in practice allocate based on optimized risk metrics such as portfolio Sharpe Ratio or portfolio volatility which is why we perform a similar exercise here.
In a first step, we looked at optimized multiasset portfolios comprising of global stocks (MSCI World AC), global bonds (Bloomberg Global Aggregate USD-hedged), and commodities (Bloomberg Commodity Index).
More specifically, we optimized these portfolios based on the following approaches:
• Minimum Variance/Volatility
• Maximum Sharpe Ratio
• Equal risk contribution (Risk parity)
The Minimum Variance approach tries to minimize the average portfolio volatility.
The Maximum Sharpe Ratio approach tries to maximize the ratio between average portfolio return (minus a risk-free return) and the corresponding average volatility. The Equal risk contribution or Risk Parity approach varies the respective portfolio weights until every asset has an identical relative contribution to the overall portfolio volatility.
In a second step, we added Bitcoin to the set of potential assets into the optimization. Our period of investigation (July 2010 – May 2024) was constrained by the fact that reliable market prices for Bitcoin only exist since 2010 as it is still a relatively young asset.
Here are the results for the different optimizations. The upper panel excludes Bitcoin while the lower panel includes Bitcoin in the optimization:
Several observations are in order:
Firstly, the minimum variance approach excludes Bitcoin completely since Bitcoin generally exhibits a higher level of volatility than the other assets.
Secondly, the maximum Sharpe Ratio approach excludes commodities in the traditional portfolio but includes Bitcoin in the new portfolio. The Bitcoin allocation is made largely at the expense of the stock allocation.
Lastly, the risk parity approach also includes Bitcoin at the expense of all other asset classes.
Furthermore, a comparison between the historical performances of the traditional portfolios that exclude Bitcoin and those that include Bitcoin reveals that the max Sharpe Ratio and the Risk Parity (ERC) portfolio were able to significantly outperform the Minimum Variance portfolio which didn’t allocate to Bitcoin at all.
It is also important to highlight that the Risk Parity portfolio with Bitcoin even exhibited a smaller maximum drawdown than the Minimum Variance portfolio without Bitcoin. In other words, the increase in portfolio volatility was largely due to an increase in positive upside volatility.
Moreover, investors are over-proportionately rewarded with higher returns for unit of additional risk as the risk-adjusted returns (“Sharpe Ratio”) increase significantly by adding Bitcoin.
The Sharpe Ratios for optimized portfolios with Bitcoin are even significantly higher than for optimized portfolios without Bitcoin.
In fact, by including Bitcoin and digital assets into their portfolio optimization, the universe of potential multiasset portfolios increases vastly.
Asset managers are not only enabled to provide investors with more efficient portfolios, i.e. higher risk-adjusted returns, but also provide investors with a much larger set of risk-return combinations compared to traditional portfolios that only include stocks, bonds, and commodities.
So far so good. What about other digital assets?
We also applied the same portfolio optimization approaches to a basket of the top 20 digital assets based on the MSCI Global Digital Assets Select 20 Capped Index.
–> The optimal % allocation is even higher in case of the Maximum Sharpe Ratio and Risk Parity portfolio optimization.
It is important to note that the period of investigation (November 2019 – May 2024) is much smaller due to the fact that younger digital assets within the top 20 digital assets like Solana or Ethereum have a smaller track record than Bitcoin.
All in all, the abovementioned results imply that even a small allocation to digital assets can have very positive effects on risk-adjusted returns without compromising the risk characteristics of the portfolios.
While highly risk-averse investors should probably avoid digital assets, the optimal allocation based on the Max Sharpe Ratio and Risk Parity approach appears to be between 2% and 3% for the full sample with bitcoin and between 4% and 6% for the smaller sample with a basket of the top 20 digital assets.
The results generally support our previous findings that we presented here.
Most portfolio optimization approaches also include digital assets within the optimal portfolio allocation which demonstrates that any modern portfolio approach that doesn’t include digital assets like Bitcoin is probably sub-optimal.
We recommend that agile asset managers familiarise themselves with this emerging asset class for the benefit of their clients and to remain competitive.
Bottom Line
• Growing Mainstream Adoption of Digital Assets: Institutional investors and major asset managers are increasingly incorporating digital assets like Bitcoin into their portfolios, as evidenced by recent filings and the launch of Bitcoin ETFs in the U.S. Despite their current small market share, these investments reflect a broader trend towards mainstream acceptance
• Impact on Portfolio Performance: The inclusion of Bitcoin in portfolio optimizations, using strategies such as Maximum Sharpe Ratio and Risk Parity, has shown to improve the risk-adjusted returns compared to traditional portfolios. Portfolios optimized with Bitcoin not only offer higher returns for the additional risk taken but also present a wider range of efficient risk-return combinations
• Optimal Allocation Recommendations: Empirical studies suggest that even a small allocation to digital assets, specifically between 2% to 3% in broader asset mixes and up to 4% to 6% in more focused digital asset portfolios, significantly enhances portfolio performance without adversely impacting overall risk profiles
To read our Crypto Market Compass in full, please click the button below:
• $TRUMP & $MELANIA: The launch of both memecoins dominated headlines, with $TRUMP reaching a $73B fully diluted valuation. These launches are indicative of a late-stage bull market, often characterized by speculative exuberance.
• Solana Continues to Outperform: Solana reached an all-time high of $286, cementing its role as the leading blockchain for retail activity due to its high performance, low costs, and user-friendly ecosystem.
• Solana Remained Robust: Despite congestion and the rate of failed transactions rising by 20%, the network remained stable compared to prior years, avoiding outages even under unprecedented demand.
• Bitcoin Quietly Hits ATH: Ahead of the inauguration, Bitcoin surged to a new ATH just shy of $109K, largely under the radar amidst the memecoin frenzy.
• DeFi Momentum Builds: Trump’s World Liberty Fund continued its aggressive crypto accumulation, totaling $350M in cryptoasset holdings. This signals potential regulatory leniency for DeFi under the new administration.
• A New Crypto Era Dawns: With crypto-friendly cabinet nominees, initiatives such as the Bitcoin Strategic Reserve (BSR), a Presidential Crypto Council, an SEC-driven crypto task force, and moves to simplify regulations, the administration signals its intent to foster innovation while solidifying the U.S.’s leadership in the cryptoasset industry.
The crypto market surged in anticipation of Trump’s inauguration, especially following the launch of his official memecoin, $TRUMP, in the early hours of Saturday. The token’s fully diluted valuation soared to $73B, attracting around 850K holders and significantly boosting Trump’s net worth in Solana-based assets. Following this, First Lady Melania Trump introduced her own memecoin, $MELANIA, on Sunday. It briefly reached a market cap of approximately $2B before experiencing a 75% retracement, as seen below in Figure 1. The frenzy surrounding these tokens propelled Solana to reach an ATH of around $286 as investors rushed to buy the asset and participate in the ecosystem. However, it’s important to remember that this level of market exuberance typically signals the late stages of a bull market, warranting a more strategic approach from investors. Nevertheless, while vigilance is called for, it’s crucial to recognize that markets still have room for growth, particularly as asset prices often exhibit explosive upside movements in the latter stages of a bull market.
Figure 1: TRUMP & MELANIA Price Performance
Source: 21Shares, Dune
Despite $TRUMP’s questionable tokenomics and potential risks for inexperienced investors, its launch likely signals a shift toward a more crypto-friendly regulatory environment under the new administration. Further, the token’s controversial success highlights memecoins’ role as an effective tool for onboarding crypto newcomers. Unlike complex blockchain projects, memecoins offer a simpler entry point into the crypto world. They can serve as a ”trojan horse,” attracting retail investors with their accessibility and cultural appeal. This initial engagement can then potentially lead users to explore more sophisticated aspects of the crypto ecosystem, including decentralized finance (DeFi) applications and AI-based projects.
That said, their extreme volatility poses significant risks as inexperienced traders may suffer losses from the tokens’ wild price swings, potentially discouraging them from further engaging with crypto.
Despite the mixed short-term and long-term effects, last week’s events revealed a clear beneficiary: Solana. Thanks to its high performance and low costs, the network has now cemented its position as the go-to platform for retail activity. Despite intense usage over the weekend, it avoided typical outages seen in 2022 and 2023, demonstrating improved stability. While some applications, like Coinbase and Phantom, faced challenges with unprecedented demand, causing temporary transaction failures to increase by almost 20%, as seen below, Solana’s network remained robust compared to previous years. What’s worth remembering is that Solana’s resilience during this surge of activity, marked by zero outages, bodes well for its ambitious goal of becoming the ”NASDAQ on the Blockchain.”
Figure 2: Solana Failed Transaction Rate
Source: 21Shares, Dune
It’s worth noting that Solana’s robust performance during this activity surge, handling up to $45B in transactions on January 20 without any outages, demonstrates the network’s progress towards their North Star of becoming ”NASDAQ on the Blockchain.” This feat is particularly impressive when compared to Nasdaq’s average daily volume of $120B, underscoring Solana’s growing capacity to handle significant financial throughput.
As depicted below, even with a significant fee increase, Solana maintains cost-effectiveness, reinforcing its appeal to retail users. However, it’s crucial to look beyond its association with speculative activities. The network is now making significant inroads in diverse sectors, demonstrating its versatility and real-world utility. Notable examples include Decentralized Physical Infrastructure (DePIN) projects like Helium, Render, and HiveMapper; AI initiatives such as Griffain and Ai16z; and tokenization efforts supported by traditional financial institutions, including Franklin Templeton, Hamilton Lane’s SCOPE, and Ondo Finance. This broad spectrum of applications underscores Solana’s potential as a robust platform for innovation across multiple industries.
Figure 3: Solana Transaction Fees
Source: 21Shares, Dune
Similarly, Trump’s endorsed DeFi initiative, World Liberty Financial, has steadily expanded its cryptoasset holding over the recent weeks. In its latest round of acquisitions over the weekend, the project added $47M in ETH and WBTC and $4.7M each in Aave, LINK, TRX, and ENA to its portfolio. This takes the total amount of World Liberty’s holdings up to $350M worth of cryptoassets. It is worth noting that the yet-to-launch protocol is staking ETH with Lido, further echoing the idea that Trump is bullish on DeFi and that the industry will likely grow under his administration.
In this context, despite widespread anticipation, crypto was not mentioned in President Trump’s inaugural address or a leaked Republican policy document outlining national priorities. This omission contrasts with earlier speculation that crypto would become a central focus of the administration. However, it’s crucial to maintain a long-term perspective: Trump’s administration remains one of the most crypto-friendly globally, as evidenced by key pro-crypto appointments and proposed policies. In the following sections, we will explore these initiatives and their potential impact on the digital asset industry.
Bitcoin Strategic Reserve
While it may have gone under the radar, BTC also reached a new ATH, just shy of $109K, ahead of Inauguration Day. Relatedly, Trump’s administration has proposed creating a Bitcoin Strategic Reserve (BSR) to position Bitcoin as a critical financial and strategic asset, similar to gold reserves. The reserve would utilize approximately 80K Bitcoin seized by the U.S. Marshals, redirecting these assets into national holdings rather than auctioning them. Expanding the reserve to a rumored 1M BTC would require Congressional approval for market purchases or over-the-counter acquisitions, potentially funded by U.S. gold reserves.
Figure 4: Theoretical Bitcoin Strategic Reserve If 1M BTC Held Since 2016
Source: 21Shares, Coingecko
The BSR would classify Bitcoin as a strategic asset, held for at least 20 years and only sold to address U.S. debt. Advocates argue this could hedge against inflation, stabilize the dollar, and leverage Bitcoin’s appreciation to reduce national debt. Additionally, it could trigger a global race among nations to accumulate Bitcoin, driving its price higher and positioning the U.S. as a leader in the emerging digital economy. However, such a move would require significant regulatory changes and face challenges like volatility and opportunity costs.
Presidential Crypto Council
Trump’s administration plans to form a presidential crypto council of about 20 industry leaders, including CEOs and founders of major crypto companies. This advisory group would provide insights into the digital asset landscape and help shape innovation-friendly policies while addressing regulatory concerns. Rumored members include Michael Saylor (MicroStrategy), Brian Armstrong (Coinbase), Jeremy Allaire (Circle), Charles Hoskinson (Cardano/Ethereum), and Brad Garlinghouse (Ripple). The council aims to ensure crypto regulation reflects real-world challenges and opportunities, demonstrating the administration’s commitment to industry engagement and positioning the U.S. as a global blockchain leader.
SEC Repeal of SAB 121
A key rumored executive order from Trump’s administration involves repealing SAB 121, an SEC accounting rule requiring companies to treat client cryptoassets as balance sheet liabilities. This repeal would:
- Reduce operational risks for firms
- Encourage broader institutional participation
- Accelerate crypto service adoption in finance
- Signal a business-friendly regulatory approach
By easing regulatory friction, this move could enhance U.S. crypto firms’ competitiveness and position the country as a global leader in cryptoasset custody and management.
SEC and CFTC Joint Collaboration on Crypto Market Structure
Another key executive order reportedly under consideration by Trump’s administration involves directing the SEC and CFTC to collaborate on a crypto market structure bill, building on the foundation laid by the FIT21 framework. This initiative aims to establish a unified regulatory framework for digital assets, addressing long-standing jurisdictional ambiguities that have left cryptoassets caught between classifications as securities or commodities. The bill would create clear and consistent rules by fostering cooperation between these two agencies, reducing regulatory uncertainty, and fostering innovation.
Ending Operation Chokepoint 2.0: Restoring Banking Access for U.S. Crypto Companies
Trump’s administration plans to address the FDIC’s debanking of crypto companies and end ”Operation Chokepoint 2.0,” a controversial initiative that restricted banking access for the crypto industry with the likes of Kraken, Coinbase, Signature Bank, Paxos, and Binance.US all sharing a similar experience. The administration aims to restore fair treatment and financial access for crypto companies by instructing federal agencies to cease discriminatory practices. This move would provide stability, attract institutional players to the U.S. crypto market, and reaffirm the administration’s commitment to fostering a competitive financial environment.
SEC’s Shift in Stance Could Pave the Way for Expanded Crypto Spot ETPs
A revamped SEC under the new administration is set to redefine crypto regulations, legitimizing the industry and fostering innovation. Clear and fair rules would signal that the U.S. is open for business, attracting top talent and projects. This regulatory clarity is expected to unlock institutional capital as traditional finance gains the confidence to invest in digital assets with legal protections. The SEC’s progressive stance increases the likelihood of approving multiple spot crypto ETPs, enabling broader adoption and integration into traditional investment portfolios. This shift validates the crypto industry and positions the U.S. as a leader in financial innovation. Further, the newly established crypto-focused task force led by Commissioner Hester Pierce is designed to establish clear regulatory guidelines, practical registration paths, and sensible disclosure frameworks for crypto companies. Thus, this new body could help approve a broader range of ETPs.
Trump Cabinet Members
While Trump’s proposed appointees are yet to go through Senate approvals, here’s a quick overview of key pro-crypto members.
• Robert F. Kennedy Jr. (Secretary of Health and Human Services): A Bitcoin advocate who views it as the ”currency of freedom” and hedge against inflation, with most of his net worth invested in Bitcoin.
• David Sacks (Crypto and AI Czar): Early Bitcoin investor and backer of projects like Solana and dYdX, bringing deep expertise to blockchain innovation.
• Paul Atkins (Chair of the SEC): Former SEC commissioner with extensive experience helping crypto-native companies navigate regulatory compliance.
• JD Vance (Vice President): A Bitcoin supporter and venture capitalist with investments in blockchain startups and a crucial advocate for pro-crypto legislative initiatives.
• Elon Musk (Co-Head of D.O.G.E): A vocal supporter of blockchain innovation, holding Bitcoin, Ethereum, and Dogecoin, with Tesla’s $1.5B Bitcoin investment under his leadership.
• Vivek Ramaswamy (Co-Head of D.O.G.E): A vocal crypto advocate and co-founder of Strive Asset Management, Ramaswamy launched the Strive Bitcoin Bond ETF, proposed backing the U.S. dollar with Bitcoin, and champions clear regulations and wallet protections to drive innovation and financial freedom.
• Howard Lutnick (Secretary of Commerce): CEO of Cantor Fitzgerald, managing Tether’s U.S. treasury portfolio while acquiring a 5% stake, and holds personal Bitcoin investments worth hundreds of millions.
• Scott Bessent (Secretary of the Treasury): Founder of Key Square Group, Bessent advocates for balanced crypto regulations and has made sizable personal investments of $250K–$500K in Bitcoin ETPs.
For a deeper dive into their backgrounds and potential impact, check out our full breakdown on our latest blog.
All in all, while Trump did not address crypto in his inauguration speech or through executive orders, he has already begun appointing key figures supportive of the industry. Thus, he is starting to follow through with his promises. It seems he’s headed towards fostering a pro-crypto environment that provides a clearer path for companies to operate within the U.S.
Nevertheless, with the exuberant market activity we’ve seen in the last few days, it’s an opportune time for investors to stay mindful and ensure their positions remain aligned with their long-term objectives and risk tolerance.
What’s happening this week?
Research Newsletter
Each week the 21Shares Research team will publish our data-driven insights into the crypto asset world through this newsletter. Please direct any comments, questions, and words of feedback to research@21shares.com
Disclaimer
The information provided does not constitute a prospectus or other offering material and does not contain or constitute an offer to sell or a solicitation of any offer to buy securities in any jurisdiction. Some of the information published herein may contain forward-looking statements. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those in the forward-looking statements as a result of various factors. The information contained herein may not be considered as economic, legal, tax or other advice and users are cautioned to base investment decisions or other decisions solely on the content hereof.
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