Why diversify with crypto

Many investors are looking for new ways to protect and grow their portfolios. One of the most compelling options? Cryptocurrency—specifically, Bitcoin. Though still volatile, Bitcoin has demonstrated a low correlation with both stocks and bonds, making it a powerful diversifier when used strategically. And as institutional adoption increases and regulatory clarity improves, it’s becoming easier to access and manage within a professionally built portfolio.

This chapter explores how crypto—particularly Bitcoin—can fit into modern investment strategies. From its impact on portfolio performance to rebalancing best practices, we break down the key insights and real-world data that every forward-thinking investor needs to know.

The diversification challenge for modern investors

Standard portfolios are losing their edge. The diversification offered by an allocation of 60% stocks and 40% bonds faded in 2022 when both asset classes underperformed, and their correlation rose to 42%, the highest level in over 20 years. This correlation has remained high as monetary policies implemented during the pandemic boosted these assets, and the resulting inflation weighed on their value. To make matters worse, a growing number of investment products trade stocks and bonds simultaneously.

This challenge has led investors to explore other asset classes, such as cryptocurrency (and particularly bitcoin), which can offer diversification and potential returns.

Why bitcoin stands out

Bitcoin offers a unique diversification benefit due to its historically low correlation with traditional asset classes. Over the past several years, Bitcoin has demonstrated low directional alignment with major equity and fixed income benchmarks—moving in tandem with the NASDAQ and S&P 500 just 33% and 34% of the time respectively, and showing only a 4% correlation with 10-year US Treasuries. Even when compared to gold, its closest analog in the digital space, the correlation remains modest at 18%.

This non-traditional behaviour positions Bitcoin as a meaningful diversifier within multi-asset portfolios. Its ability to perform independently from both risk-on and risk-off assets creates the potential to smooth portfolio returns and reduce correlation drag—especially during macroeconomic dislocations.

However, investors must also weigh Bitcoin’s volatility, which remains elevated relative to other asset classes. As a nascent and sentiment-driven asset, Bitcoin is highly sensitive to regulatory shifts, macroeconomic narratives, and technological developments, even though this behaviour tends to dissipate the more it matures. 

How much bitcoin makes sense?

Even a relatively small allocation- as little as 4%- can make a meaningful difference.

As an experiment, CoinShares added bitcoin to a standard portfolio and three proven strategies formulated by leading investment professionals:

• Ray Dalio’s All Weather strategy (30% stocks, 40% long-term bonds, 15% medium-term bonds, 7.5% natural resources and 7.5% gold). Bitcoin replaced gold.

• Dylan Grice’s Cockroach portfolio (equal allocations to global stocks bonds and 25% gold). CoinShares reallocated 7% of the gold holding to bitcoin.

• CoinShares also attempted to replicate the Yale Endowment strategy (25% absolute return strategies, 19% private equity, 13% US stocks, 11% global stocks, 8% emerging market stocks and 7% commodities, global bonds and real estate investment trusts or REITs). Bitcoin replaced the REITs.

Analysis of performance between 2017 and 2024 showed that annualized returns more than doubled in each case, except for the standard portfolio, which experienced a healthy increase nonetheless. While volatility rose slightly across all four strategies, correlation with the standard portfolio dropped markedly, demonstrating the power of bitcoin as a source of diversification.

Beyond Bitcoin

While Bitcoin continues to play a foundational role in digital asset portfolios, it represents only one segment of a rapidly evolving asset class. For investors seeking broader exposure to the financial infrastructure of the future, emerging cryptocurrencies like Ethereum and Solana offer differentiated opportunities, both in terms of technological innovation and portfolio diversification.

These assets are not competing with Bitcoin as a store of value. Instead, they power the next generation of decentralized applications (dApps), smart contracts, and tokenized ecosystems, forming the technological backbone of decentralized finance (DeFi), an architecture which tends to be adopted by major players because it reduces costs, latency and provides interoperability for all the stakeholders.. As such, they offer investors the chance to participate in the expansion of digital financial services, in much the same way early internet companies offered exposure to the digitization of commerce.

How to manage crypto exposure over time

While performance impact is notable, proper portfolio management is essential—particularly when dealing with volatile assets like Bitcoin. All portfolios in CoinShares’ analysis were rebalanced quarterly, a key risk-control mechanism that prevents outperforming assets from distorting the intended risk profile.

Rebalancing can follow either a calendar-based schedule (e.g. quarterly or annually) or a threshold-based approach (triggered when an asset allocation drifts beyond a set band). Each method comes with trade-offs. Calendar-based rebalancing offers discipline, while threshold-based rebalancing responds more dynamically to market movements. A hybrid approach, combining both methods, can balance cost-efficiency and risk control. 

Final thoughts for investors

How much bitcoin an investor should hold depends on their goals. But when used strategically, it can diversify a portfolio and potentially boost returns. As CoinShares research proves, an allocation of between 4% and 7.5% is optimal and only has a minimal impact on volatility. However, it’s important to remember to rebalance the portfolio, ideally restoring its original allocation regularly, as otherwise bitcoin’s price fluctuations could impact the risk profile.