THE BALANCED LEDGER:

Sweet Spot

Allocating to Bitcoin and Ethereum ETFs in a 60/40 Portfolio

By Rick Lake | Founder, Narrative Alpha
May 2, 2025

Digital assets have moved from the periphery to the mainstream. What began as a niche asset class is now being considered by institutions, advisors, and investors alike.

A wave of regulatory approvals and product innovation – particularly the launch of spot Bitcoin and Ethereum ETFs – has accelerated interest, prompting a fresh look at how these vehicles might fit within diversified portfolios. With these ETFs gaining traction across both institutional and retail channels, digital assets are becoming a more frequent topic in asset allocation.

Advisors are now tasked with balancing the growth potential and diversification benefits of these tools against their well-documented volatility, drawdowns, and risks.

Finding the right allocation – the “sweet spot” – has moved to the forefront of conversations shaping the future of portfolio construction.

A Whirlwind of Digital Asset News

Digital asset markets have undergone significant transformation over the past 18 months. A series of rapid developments – beginning with the approval of spot Bitcoin ETFs in early 2024 – has reshaped how institutions, advisors, and regulators view this evolving asset class.

  • January 2024: The SEC approved the first U.S. spot Bitcoin ETFs, opening the floodgates for regulated access.
  • Mid-2024: Institutional filings revealed that pension funds, asset managers, and RIAs were allocating billions to Bitcoin ETFs.
  • Summer 2024: Spot Ethereum ETFs gained SEC approval in July, offering investors choices beyond Bitcoin.
  • Late 2024: Bitcoin ETF assets surpassed $100 billion, fueled by price appreciation and growing optimism about regulatory clarity and mainstream adoption.

In 2025, the momentum has continued with further significant developments:

  • Policy Changes: White House executive orders seek to drive a shift in public policy for digital assets, but the impact is evolving.
  • Regulatory Evolution: New SEC leadership has signaled a more open stance toward digital assets, though broader regulatory guidance is still pending.
  • Product Innovation: Other digital assets gain ETF exposure through futures-based and leveraged products, signaling expansion beyond Bitcoin and Ethereum. In addition, digital asset index funds and smart beta crypto strategies are emerging to meet growing advisor demand for diversified exposure – but access via ETFs is still pending.
  • Market Maturity: While prices have moderated from Bitcoin’s late 2024 highs, institutional ownership continues to rise, reinforcing digital assets’ evolving role as part of a diversified investment strategy.

Against this backdrop, advisors face a pressing question: what role should digital assets now play in balanced portfolios – and how much exposure, if any, is appropriate for clients in today’s environment?

What Allocations Do Leading Investment Firms Suggest?

Major U.S. investment and research firms and industry analysts have conducted extensive research on incorporating digital assets into traditional portfolios. Their analyses highlight the potential benefits of these assets – such as diversification and enhanced returns – while underscoring the need for cautious sizing due to the inherent volatility of cryptocurrencies.

BlackRock: 1% to 2% Allocation[1]

BlackRock views Bitcoin as a maturing asset class with a unique value proposition. Their research suggests:

  • Allocation Range: 1% to 2% of a 60/40 portfolio.
  • Risk Contribution: A 1% to 2% allocation provides a similar risk contribution as the “Magnificent 7” technology stocks contribute to the MSCI World equity index.
  • Portfolio Impact: This modest allocation enhances risk-adjusted returns without significantly increasing overall portfolio risk.
  • Tactical Considerations: Bitcoin’s role may shift over time, becoming more like gold, to hedge against specific risks rather than serving as a core holding.

In early 2025, BlackRock took a significant step by incorporating its iShares Bitcoin Trust ETF (IBIT) into select model portfolios, allocating between 1% and 2%. These portfolios are designed for investors with a higher risk budget and growth objectives, marking the first time BlackRock has included Bitcoin in its model portfolio universe.[2]

Fidelity: 0% to 5%[3]

Fidelity analyzes allocating to Bitcoin from the critical perspective of the long-term impact on retirement income and spending:

  • Allocation Range: 0% to 5% of a portfolio for long-term investors.
  • Scenario Analysis: Fidelity’s scenario analysis suggests that conservative allocations may limit downside risk, even in worst-case environments.
  • Retirement: A small 2% allocation can enhance annual retirement spending potential by 1% to 4%, with potential losses to retirement income of -0.5% to -1.0%
  • Multi-Dimensional: Fidelity views Bitcoin as multi-dimensional: a buy-and-hold investment, venture-like with 24/7 trading, and a potential “gold-like inflation hedge.”

VanEck: 6%[4]

VanEck’s analysis focuses on finding the optimal mix of Bitcoin and Ethereum in a traditional 60% equity/40% bond portfolio:

  • Allocation Range: Up to 6%, split equally between Bitcoin and Ethereum (3% each).
  • Risk-Adjusted Returns: A 6% allocation funded equally from stocks and bonds provided the highest risk-adjusted returns and Sharpe ratio with a limited increase in maximum drawdowns.
  • Rebalancing: Monthly rebalancing helps manage volatility and maintain allocation targets.

Bloomberg: 0% to 5%[5]

Bloomberg applies a sophisticated, institutional risk framework approach to digital asset allocation:

  • Allocation Range: 0% to 5% of a multi-asset portfolio.
  • Sharpe Ratio Optimization: Historically, incremental increases to a digital asset allocation improved both returns and risk-adjusted returns but led to greater maximum drawdowns.
  • Max Loss Tolerance: Bloomberg introduces the concept of Max Loss Tolerance (MLT): how much of an additional loss are you willing to tolerate if crypto goes to zero while your overall portfolio is in a drawdown?
  • Sizing: A small crypto allocation has significantly enhanced returns but understanding your risk tolerance is key to sizing when deciding how much to invest.

Morningstar: 1% to 2%[6]

Morningstar’s analysis highlights the potential benefits and risks of adding Bitcoin and Ethereum to a traditional 60/40 portfolio:

  • Allocation Impact: A 1% to 2% sleeve of Bitcoin and ether historically has enhanced returns for a 60/40 portfolio with a modest increase in volatility.
  • Tipping Point: A 5% allocation to a Bitcoin/Ethereum blend is the tipping point with significant increases to standard deviation and drawdowns.
  • Downside Risks: During market downturns, such as the 2021-2022 crypto decline, portfolios with 5% cryptocurrency allocations underperformed traditional 60/40 portfolios by at least 3 percentage points, emphasizing the risks during periods of stress.
  • Words to the Wise: “Bitcoin and ether’s galactic returns may be compelling to investors, but their volatility can have a colossal impact on a standard 60/40 portfolio… [with] a heightened risk profile.”

Advisors should carefully evaluate client risk tolerance and objectives before incorporating digital assets into portfolios.

Bringing It All Together: Common Ground and Advisor Action Steps

Despite differing methodologies, major firms generally align with Ric Edelman’s “1% Asset Allocation Strategy”[7] – start small and stay cautious. Allocations between 1% to 6% are suggested as optimal for balancing the potential rewards of digital assets with their risks. Here’s how advisors may consider approaching this new frontier:

  1. Assess Client Objectives: Align digital asset allocations with clients’ risk tolerance, time horizons, and financial goals.
  2. Start Small: Initial allocations of 1% to 2% allow for gradual exposure while mitigating volatility.
  3. Diversify: Consider including both Bitcoin and Ethereum to capture their complementary roles – Bitcoin as a potential store of value and Ethereum as a growing technology platform.
  4. Monitor and Rebalance: Regularly review allocations and rebalance portfolios to maintain strategic targets.
  5. Plan for Worst-Case Scenarios: Advisors should consider the possibility that a digital asset allocation could decline sharply – or even go to zero – and ensure clients understand the risks before investing.

By thoughtfully integrating digital asset ETFs into balanced portfolios, advisors can position their clients to benefit from the evolving investment landscape while managing risks responsibly. As digital assets continue to mature, these early steps may lay the groundwork for long-term participation.

Rick Lake writes and speaks about alternative investing and digital assets. Learn more at his website: www.ricklake.com

Disclaimer:

This content is for informational and educational purposes only and is not investment advice or a recommendation to buy, sell, or hold any security or strategy. The views expressed are the author’s and do not necessarily reflect those of any firm or contributors. Information is believed to be reliable at the time of writing but is not guaranteed to be accurate or complete.

Past performance is not indicative of future results. All investments involve risk and may not be suitable for all investors. Digital asset strategies may entail a significant risk of loss, including the potential for total loss, and may not be appropriate for every portfolio.

Financial professionals must perform their own due diligence and consider each client’s goals, risk tolerance, and financial circumstances. This content does not constitute legal, tax, or accounting advice.

FOOTNOTES

[1]Samara Cohen, Paul Henderson, Robert Mitchnick, and Vivek Paul, “Sizing bitcoin in portfolios”, BlackRock Investment Institute, December 2024

[2]Katie Griefeld, “BlackRock Adds its Bitcoin ETF to Model Portfolio for First Time”, Bloomberg News, February 28, 2025

[3]Jurrien Timmer, Emil Iantchev, and Mike Rusinak, “The case for bitcoin”, Fidelity Institutional Insights, March 14, 2024

[4]Matthew Sigel, Denis Zinoviev, and Patrick Bush, “Optimal Crypto Allocation for Portfolios”, Van Eck, October 2024

[5]Jigna Gibb, “The power of a crypto allocation with an institutional perspective”, Bloomberg Professional Services, May 17, 2024

[6]Stephen Margaria, “Are Two Cryptos Better Than One for a 60/40 Portfolio?”, Morningstar, July 22, 2024

[7]Ric Edelman, “Ric Edelman’s 1% Asset Allocation Strategy into Digital Assets”, DACFP.com

The views and opinions expressed in this article are solely those of the author and do not necessarily reflect the position of DACFP or its affiliates. This content is provided for educational and informational purposes only and does not constitute investment, financial, legal, tax, or accounting advice, nor an offer, solicitation, or recommendation to buy or sell any security or other asset. Information is current as of the date of publication and may become outdated; no representation is made as to its accuracy or completeness. Publication does not constitute an endorsement of the author, the author’s firm, or any product or service referenced, and the author may hold positions in the assets discussed. Readers should consult their own qualified professionals before making any financial decisions.