When considering allocating bitcoins in an investment portfolio, the strategy should be carefully considered, largely due to bitcoin’s very high volatility.

Some market commentators point out that the very high volatility of bitcoin constitutes a major obstacle to its use and investment; however, investors may be able to minimize or otherwise utilize this volatility in a portfolio through a variety of familiar approaches.

Many traditional strategies are applicable to manage Bitcoin volatility. This article will present three that may be of interest to financial advisors and investors alike.

1. Allocation sizing based on objectives

Goal-based allocation is built around the concept of setting limits for the percentage of exposure to assets as part of a broader portfolio. An example would be a 2.5% allocation to bitcoin in a $10 million portfolio, meaning investors are targeting $250,000 of bitcoin exposure.

This can be extended to include “tolerances”, allowing the allocation to fluctuate within a defined range. This is particularly useful for a very high volatility asset like Bitcoin. If this tolerance percentage is exceeded, bitcoin will either be bought or sold (rebalanced) to bring it back within the limits. For example, a portfolio can set a 5% allocation to Bitcoin with a 2.5% tolerance – the allocation can vary from 2.5% to 7.5% before rebalancing is performed.

2. Temporal rebalancing

An alternative to goal-based allocation sizing, time-based rebalancing instead focuses on rebalancing on a defined time basis, ranging from a week to a year. This can be used as a standalone strategy, simply reaping losses or gains before an investor steadily reduces their exposure to the exact targeted size.

Rebalancing strategies can significantly change the risk/return characteristics of a portfolio, with long-term strategies (e.g. annually) potentially leaving a large window for cascading price actions. Conversely, rebalancing too frequently can lead to potentially missed returns.

Rebalancing on a defined time basis and when tolerances are exceeded can provide investors with a more versatile strategy for managing bitcoin volatility, particularly when considering annual rebalancing.

3. Average Dollar Cost

Dollar cost averaging is another traditional strategy that can be applied to Bitcoin investing, in which a fixed amount is invested over recurring periods, such as purchasing a fixed amount weekly, monthly, or quarterly.

This is sometimes done on an ongoing basis, accumulating a large and growing position without a defined sales or balancing strategy. This strategy (often referred to as an “HODL” strategy) is commonly used by retail crypto investors to build long-term holdings. The intended effect is to reduce the average price paid for the investment and maximize returns with minimal ongoing management – ​​in effect a “set it and forget it” strategy.

However, this may lead to allocation sizing beyond initial targets, thereby skewing your actual exposure in a manner inconsistent with your risk profile.

Combining a DCA strategy with a goal-based allocation and/or time-based rebalancing strategies can allow investors to slowly build up a portfolio allocation over time while ensuring it does not exceed the total amount of risk and exposure they are willing to accept.

In conclusion

The strategies above can be used individually or in combination depending on the broader investment theses and risk appetite for Bitcoin.

This list is not exhaustive and is intended to increase the viability of simple, potentially overlooked strategies to consider when managing Bitcoin exposure.

While this article covers strategies for managing the volatility of Bitcoin exposure, investors may find it useful to consider the suitability of Bitcoin in their investment portfolio more broadly.

If you are considering acquiring or managing exposure to the Bitcoin or crypto-asset markets, speak to a licensed financial advisor.