11 August 2025, Baden-Württemberg, Rottweil: The logo of the cryptocurrency Bitcoin can be seen on the display of a smartphone. Bitcoin is currently scratching record highs. Photo: Silas Stein/dpa (Photo by Silas Stein/picture alliance via Getty Images)
dpa/picture alliance via Getty Images
Bitcoin has emerged as one of the top-performing assets in international markets and is increasingly recognized as more than just a trend among millennials. In the past year alone, the cryptocurrency has nearly doubled, currently trading at approximately $119,000. This surge raises an important question for long-term investors: should Bitcoin be included in a retirement portfolio? By considering a capped 5% allocation, the data indicates that Bitcoin has not only enhanced historical returns but has also done so with only a slight increase in risk, creating an unusually advantageous trade-off for portfolio construction.
What’s Important For Retirement?
Younger clients with many years to invest can weather the volatility of cryptocurrencies. However, this is not the case for retirees or those approaching retirement. Here are the key considerations for them:
- Capital preservation & income stability to manage living, healthcare, and lifestyle expenses.
- Lower volatility tolerance due to having fewer working years remaining, making the sequence of returns and drawdowns significant concerns.
- Moderate growth to outpace inflation in order to maintain purchasing power over a potential life expectancy of 20-30+ years.
Strategic asset allocation is essential for achieving retirement objectives. We adopt a macro-conscious approach to asset allocation, even within equities – adjusting exposure across sectors and styles in the High Quality Portfolio. Given these objectives – does a volatile and risky asset like Bitcoin fit? As it turns out, it fits remarkably well.
Bitcoin Can Add A Lot Of Return, And Very Little Volatility To A Portfolio
Let’s examine a portfolio consisting of 60% equities and 40% bonds – using an S&P 500 index fund and iShares Core U.S. Aggregate Bond ETF (AGG) as examples. We will compare it to a portfolio that allocates 5% of the equity portion to Bitcoin. Additionally, we will analyze both 10-year and 5-year data to determine if there are any changes in characteristics.
The analysis includes two periods: the past 10 years and the past 5 years, to evaluate whether the relationship between risk and return has remained consistent.
Return and risk comparison
Trefis
Key Findings
- In both periods, the introduction of just 5% Bitcoin resulted in an increase in annualized return of approximately 4 to 5 percentage points.
- Volatility increased by only about 1 percentage point, indicating that the additional risk was modest compared to the enhanced returns.
- Sharpe ratios – which measure risk-adjusted performance – improved significantly to 103% over 10 years and 81.5% over five years, indicating that the portfolio became more efficient despite the increased volatility.
The maintenance of a favorable risk-reward ratio over a shorter timeframe of 5 years is promising for retirement accounts – mitigating the risk of liquidation (if necessary) during adverse drawdown scenarios.
Risks
While the data is compelling, there are several risks that investors should consider.
- High volatility: Bitcoin has undergone drawdowns of 70-80% on multiple occasions, which can be unsettling even with small allocations.
- Limited historical track record: Our 10-year back test coincides with Bitcoin’s most significant adoption and price appreciation period. As the asset matures, return and risk dynamics may vary.
- Correlation spikes in crises: Bitcoin may move in the same direction as stocks during steep market sell-offs, thereby diminishing the diversification benefits.
- Crypto-specific risks: Risks associated with counterparty, hacking, and custodial vulnerabilities are significant for crypto investors. Additionally, there are regulatory and policy uncertainties surrounding this evolving asset class.
The study on a 5% allocation to Bitcoin illustrates how minor, strategic modifications can enhance portfolio efficiency. The High Quality portfolio adheres to similar principles, outperforming the S&P 500 with over 91% total returns since inception through disciplined asset selection and risk management.