Investors today are facing many challenges in financial markets. Bitcoin, as one of the new investment assets, received increasing attention. This research paper analyzes the performance of Bitcoin from 2013 until today, with a special focus on its performance during the pandemic. We found that including Bitcoin in a portfolio would reward investors with higher risk-adjusted returns, because of the low correlations of Bitcoin with other financial asset classes.

The paper is structured as follows. The first section analyzes the performance of Bitcoin and other  financial assets from 2013 through 2020, with a focus on the correlations across financial assets. The second section compares the performance of 60/40 portfolios with different sizes of allocations to Bitcoin.  Taking 60/40 portfolio with and without Bitcoin allocation as examples, section three discusses the impact of Bitcoin on efficient frontier. The last section concludes with key takeaways.

Performance of Financial Assets and Bitcoin from 2013 to 2020

As a fintech innovation, crypto asset values are increasing exponentially. Invented in 2008, Bitcoin now has a market capitalization at $117.81B.  Would investors benefit from adding crypto assets into their investment portfolios? What would be a meaningful allocation? In this report, we will analyze and compare the performance of traditional 60/40 portfolios with 1%, 5%, 10% and without allocation to Bitcoin. Table 1 shows the financial assets included in our analysis.

Table 1 Financial Assets Involved in the Analysis Report

Figure 1 shows the performance of financial assets and of Bitcoin since April 2013. The price of Bitcoin explodes in 2017 from $1,037 at the beginning of that year to the peak of $18,928 in December. Figure 2 shows prices of financial assets scaled by 90-day rolling volatility.

Figure 1 Value of $1 invested in Financial Assets since April 2013
Figure 2 Price of Financial Assets Scaled by 90-Day Volatility

While Bitcoin has attractive returns, it also shows a frightening volatility, which is around 5 to 10 times higher compared to other financial assets (Figure 3). There are many factors leading to the high volatility of Bitcoin, including speculations, news events, and regulations. But does it mean investors should not consider Bitcoin for their investment portfolios? To answer this question, we first examine the correlations across financial assets.

Figure 3 Rolling 90-Day Volatility of Financial Assets

Figure 4 shows the 90-day rolling average correlations of one financial asset with the others. Bitcoin suffers a significant shock caused by the COVID-19 and moves in tandem with other financial assets in March 2020. However, we believe this phenomenon would diminish gradually, as we find that correlations usually increase under global-wide market shocks like the COVID-19 pandemic (for details: Which Portfolios Outperformed during the Covid Crisis?). In fact, before the global financial market turbulence early this year, Bitcoin has very low correlations with other financial asset classes (Table 2).

Figure 4 Average Correlations across Financial Asset Daily Returns (Rolling 90 Days)
Table 2 Correlations across Financial Assets (Apr 2013 – Dec 2019)

The reasons that Bitcoin could be traded as an uncorrelated asset are specific drivers of its return. As one of the crypto currencies, the price of Bitcoin is influenced by factors such as the technology development, regulatory and the market adoption. Because of the nearly zero correlations of Bitcoin with other assets and the modern portfolio theory, we expect a portfolio with allocation to Bitcoin would bring a higher risk-adjusted performance, which we will analyze in the following section. Financial assets like equities, bonds and commodities are driven by factors such as economic growth and inflation, as analyzed in our report Impact of Macroeconomic Factors on Financial Assets and Portfolios. Because of the shared drivers among traditional financial assets, they become more related to one another. Table 3 summaries the performance of assets during our study’s time frame.

Table 3 Performance stats of Financial Assets (Apr 2013 – Jul 2020)

Portfolio Performance

To evaluate the impact of Bitcoin on a portfolio, we choose a traditional 60/40 portfolio as the benchmark and compare it performance with performance of portfolios with 1%, 5% and 10% allocation to Bitcoin.

Figure 5 Cumulative Returns of Portfolios (Apr 2013 – Jul 2020)

Figure 5 shows the performance of portfolios with different levels of allocation to Bitcoin. The results are consistent with our expectation that we can achieve superior risk-adjusted returns by allocating even just a small percentage of investment to Bitcoin. This is mainly due to the low correlation of Bitcoin with equities and bonds and its strong performance in recent years. Figure 6 shows the portfolio drawdowns for a pure 60/40 portfolio and 60/40 with a 5% allocation to Bitcoin.

Figure 6 Drawdowns of Portfolios
Table 4 Portfolios Performance Stats (Apr 2013 – Jul 2020)

Table 4 shows portfolio performance stats. Although adding Bitcoin to a portfolio increase the volatility, it brings better risk-adjusted returns, with a Sharpe ratio of 1.38 for the portfolio with 10% allocation to Bitcoin, 54% to SPY and 36% to AGG. Allocations to Bitcoin enhance portfolio returns without introducing dramatic volatilities. Another reason we think that makes Bitcoin a valuable contributor to a portfolio is its resilience to macroeconomic environment (Figure 7). Similar to other assets, Bitcoin faces the market shock caused by COVID-19. But it shows resilience to such shocks. For example, the portfolio with 5% allocation to Bitcoin reaches a higher Sharpe ratio at 0.49 with a slightly increase of volatility compared to 60/40 portfolio (Table 5).

Figure 7 Cumulative Returns of Financial Assets since Jan 2020
Table 5 Portfolios Performance Stats (Jan 2020 – Jul 2020)

Efficient Frontier by Allocating to Bitcoin

As some investors are still not familiar with digital assets like Bitcoin, they may under allocate to this asset class. According to Modern Portfolio Theory, an optimal portfolio could be achieved with a balance of risk and return. Portfolios that lie on the efficient frontier are preferred as they provide the highest returns with given levels of risk or lowest risks with defined returns. Figure 8 shows the efficient frontiers of portfolios without (in blue) and with (in red) 5% allocation to Bitcoin. The risk-adjusted return improves obviously by including Bitcoin in a portfolio. For example, the Sharpe ratio increases from 0.82 to 1.34 by allocating 5% Bitcoin to a portfolio investing in bonds (AGG) only. Bitcoin itself may seem risky, but with a well-designed allocation and trading strategy, it could significantly increase a portfolio’s risk-adjusted return.

Figure 8 Efficient Frontier with and without an allocation to Bitcoin


The previous results highlight the following key insights:

  • Bitcoin has nearly zero correlations with other financial assets and provides protection during period of market crisis: During our study’s time frame (2013 – 2020), Bitcoin has low correlations with other financial asset classes including equity, fixed income and commodity. Even though the correlations increase during the pandemic, we expect that Bicoin performance will continue to be independent from other financial assets in the long term because of the specific drivers of its price. This feature of Bitcoin makes it a good tool for investors who have portfolios concentrated in equities and bonds to diversify portfolios.
  • Small allocations to Bitcoin historically provided great risk-adjusted returns compared to portfolios without it: during our study’s time frame, adding Bitcoin to a traditional 60/40 portfolio increases the portfolio’s Sharpe ratio significantly. The similar benefits are also observed in portfolios with different sizes of Bitcoin allocation. Investors could benefit tremendously from including Bitcoin into their portfolios, making the portfolio more diversified and more efficient in risk resilience.

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