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Bitcoin Barbell Strategy: A Game-Changer for Beating Market?

A barbell strategy is an investment strategy where you put a good majority (maybe 80%) of your portfolio in a safe asset and a minority (maybe 20%) in a high risk asset. The whole idea is to have an overall portfolio which grows well during the good times yet has sufficient protection during the bad times.

When using the barbell strategy, you tend to go to extreme ends. You don't include any constituents that are "in the middle" in terms of risks and returns. To put things in perspective, what is considered safe could be the likes of bonds, and gold to certain extent. And what could be considered high risks could be single tech stocks or even Bitcoin.

The barbell strategy has been gaining popularity of late as more retail investors are looking into the possibility of adopting such strategy for their portfolio.

Here, I am looking to just do a simple backtesting to look at how a bitcoin barbell strategy could perform against the index over the past 10 years.

For the safe assets, I shortlisted two choices- Vanguard Total Bond Market Index (VBMFX) and SDPR Gold Shares (GLD)

Hence, two portfolios will be constructed here.

  1. 80% VBMFX 20% Bitcoin

  2. 80% GLD 20% Bitcoin

These portfolios will be compared against two scenarios (100% Bitcoin and also Vanguard 500 Index)

Using Portfolio Visualizer, below are the results.

The strategy with 100% Bitcoin provided the highest returns obviously. However, it is also accompanied with large volatilities (with big swings both upwards and downwards). The Vanguard 500 Index provided the lowest returns.

The two portfolios (80% VBMFX 20% Bitcoin and 80% GLD 20% Bitcoin) sit right in the middle. They convincingly beat the market over the 10-year period without the huge swings in volatilities that you get with a 100% Bitcoin strategy.

If we dwell into the specific data, here they are.

Both portfolios (80% VBMFX 20% Bitcoin and 80% GLD 20% Bitcoin) have low correlation to the index. They are not much dependent on how the market performs yet outperform the market over the 10-year period. However, the volatility of these both portfolios are still higher than the index. This is not really a good thing as it implies more risk.

What if we push the mix to be the extreme end of 97% and 3%?

Here is what you get.

With these changes, the returns of the portfolios pales in comparison when compared against the previous results. However, the portfolio of (97% GLD 3% Bitcoin) still outperforms the index in terms of CAGR, has a lower volatility (sees Standard Deviation) and is also relatively uncorrelated to the index. All these come from a mere 3% investment in Bitcoin.

Without this 3% investment in Bitcoin, a 100% GLD portfolio could have underperformed the index by a mile.

Of course, there could be some arguments here such as short time period as the period of backtesting is only 10 years and also the fact that the outperformance of the 97% GLD 3% Bitcoin portfolio against the index is minimal.

However, I think this exercise shows that just a small allocation of Bitcoin in your portfolio of safe assets might be just what you need to have a good chance to outperform the market eventually.

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