For many years, the prevailing investment view has been: Bitcoin should not account for more than 1% of the portfolio, or a maximum of 3% if you are a venture investor or have many years until retirement. However, this view is gradually changing as Ric Edelman – a leading financial expert and member of the Hall of Fame selected by Barron's magazine – boldly recommends that Bitcoin's weight in the portfolio should increase to at least 10%, possibly even up to 40%.

New Context: Bitcoin and the Obsolescence of the 60/40 Portfolio

Edelman argues that the traditional 60/40 portfolio (60% stocks, 40% bonds) has become outdated in the current context. The simple reason is that people are living longer. While the 60/40 portfolio was designed in the 1950s – when the average life expectancy was much lower – today, Edelman predicts that the average American lifespan could reach 100 years due to advances in medicine and technology.

Thus, today's investors, even at the age of 60, can have investment perspectives similar to those of 30-year-olds in the past. And as investment time extends, the portfolio also needs to be more flexible and growth-oriented – where Bitcoin emerges as a top candidate.

Bitcoin: The Best-Performing Asset of the Past Decade

It is undeniable that Bitcoin is one of the best-performing assets of the past decade. For many years, BTC has consistently topped the list of the highest-yielding assets – even far exceeding the strongest growth tech stocks. Therefore, many experts believe that adding Bitcoin to the investment portfolio will help 'accelerate' returns, which is especially important if you want to prepare for a longer, more expensive retirement.

But is a 10% allocation too risky?

Although the theory sounds reasonable, increasing Bitcoin's weight to 10% or higher still raises concerns for many. Last year, BlackRock Inc. – the group behind the iShares Bitcoin Trust ETF (NASDAQ: IBIT) – published a report titled 'Sizing Bitcoin in Portfolios'.

According to this report, BlackRock used Modern Portfolio Theory (MPT) to analyze the impact of adding Bitcoin to a 60/40 portfolio. The results showed:

  • The optimal allocation of Bitcoin should only be from 1% to 2%.

  • When exceeding 4%, the risk in the portfolio spikes. Specifically, at a weight of 4%, Bitcoin no longer only accounts for 4% of the risk but up to 14% of the overall risk.

  • If the weight increases to 10% or 20%, the risk of the entire portfolio will become overly dependent on Bitcoin's fluctuations.

This means that no matter how well your stocks or bonds perform, if Bitcoin drops sharply, the entire portfolio will be heavily affected.

Bitcoin: Diversification Tool or Double-Edged Sword?

A notable point that both Edelman and BlackRock agree on: Bitcoin has no close correlation with any traditional asset class, including stocks, bonds, gold, or commodities. This makes Bitcoin a very strong diversification tool – helping to reduce overall risk if used correctly.

However, 'diversification' does not mean absolute safety. Bitcoin remains an extremely volatile asset – having dropped by up to 65% just in 2022. Therefore, if you want to add it to your portfolio, you need to understand its risk nature thoroughly.

So how much should be allocated to Bitcoin to be reasonable?

Based on over a decade of data and new tools like spot Bitcoin ETFs, adding Bitcoin to the investment portfolio has now become easier than ever. But what weight is appropriate?

  • For traditional investors, 1% remains a safe and reasonable level.

  • If you accept higher risks, consider increasing to 2% to 4%.

  • Before exceeding 5%, truly understand Bitcoin's volatility and your own risk tolerance.

  • A weight of 10% or more should only be considered by investors with a very long-term vision, high risk tolerance, and a solid grasp of overall asset allocation strategies.

Conclusion

Bitcoin is gradually transitioning from a speculative asset to a legitimate component of the modern portfolio. However, the allure of high returns always comes with significant risk. Increasing Bitcoin's weight to 10% may help you achieve superior returns, but it can also lead to an unbalanced portfolio.

Final advice: Don't invest based on emotions – invest based on data, strategy, and your own risk tolerance.