November 8, 2024

Portfolio Performance Analysis: Bitcoin and High-Yield Short-Term Corporate Bonds

This analysis examines how combining Bitcoin with High-Yield Short-Term Corporate Bonds in different proportions, coupled with systematic rebalancing, can potentially create portfolios with attractive risk-adjusted returns. The study covers a 10-year period from October 2014, to November 2024, comparing three portfolio strategies against traditional benchmarks. Each strategy maintains a fixed Bitcoin allocation through weekly rebalancing, aiming to capture Bitcoin's growth potential while managing its inherent volatility.

Chart Analysis:

The charts above present related but distinct views of the portfolio performance data. The top chart uses a logarithmic scale and includes Bitcoin's performance along with the portfolio strategies and benchmark indices. This scale emphasizes percentage changes, making it easier to see growth patterns and compare performance across different time periods - for instance, a doubling of value shows the same distance whether it's from $100 to $200 or $10,000 to $20,000.

The bottom chart uses an arithmetic scale and focuses on the Conservative, Balanced, and Growth portfolio strategies compared to just the S&P 500 and High-Yield Short-Term Corporate Bonds, excluding Bitcoin's performance line to better show actual dollar gains and losses over time.

• Bitcoin's black line shows high growth potential with significant volatility.

• High-Yield Short-Term Corporate Bonds (yellow line) provide stability.

• The S&P 500 (red line) serves as both a performance benchmark and volatility yardstick.

Performance Overview:

The following table is based on 10 years of returns ending November 8, 2024. All assets start on October 25, 2014, with a base value of $100. Note that the maximum drawdown metrics are based on weekly data and will therefore differ from drawdown metrics calculated using daily data.

Key Terms and Metrics:

• Annual Return: Measures the yearly rate of gain or loss on an investment, calculated by comparing the starting and ending values over a given time period. For instance, a 10% annual return indicates that a $100 investment grew to $110 over one year. For multi-year periods, returns are annualized to show the consistent yearly rate needed to achieve the total gain.

• Weekly Standard Deviation: Measures short-term price volatility by calculating the average variation in weekly price changes. A weekly standard deviation of 2% means that about two-thirds of weekly returns fall within ±2% of the average return. Lower values indicate more stable week-to-week performance.

• Annualized Standard Deviation: Converts weekly volatility to an annual basis by multiplying weekly standard deviation by √52. This provides a yearly perspective on volatility and is used in calculating risk-adjusted returns. An annualized standard deviation of 15% suggests that about two-thirds of annual returns fall within ±15% of the average.

• Maximum Drawdown: The largest peak-to-trough decline over a period, showing the worst-case scenario for an investor who bought at the peak. For example, a 20% maximum drawdown means an investment declined from $100 to $80 before recovering.

• Sharpe Ratio: Measures excess return per unit of risk, calculated as (Return - Risk-Free Rate) / Annualized Standard Deviation. A Sharpe Ratio above 1.0 is generally considered good, with higher numbers indicating better risk-adjusted returns.

• Calmar Ratio: Measures return relative to maximum drawdown risk, calculated as Annual Return / Maximum Drawdown. A Calmar Ratio of 2.0 means the investment provided 2% of annual return for each 1% of maximum drawdown risk. Higher values indicate better returns per unit of drawdown risk.

Together, these metrics provide a comprehensive view of both investment performance and risk characteristics.

Strategy Characteristics:

Each portfolio strategy offers distinct benefits:

• Conservative: Stability-focused while capturing Bitcoin's growth.

• Balanced: Enhanced returns with managed volatility.

• Growth: High growth potential for risk-tolerant investors.

Key Observations:

• Bitcoin had the highest return (74.83%) but also the highest volatility, with a weekly standard deviation of 8.31% and a massive maximum drawdown of 82.88%.

• The S&P 500 experienced a significant 35% maximum drawdown with a low Calmar Ratio of 0.32.

• Compared to the S&P 500's 35% drawdown, the portfolios also showed superior risk management:

• Conservative Portfolio: 4.64% drawdown.

• Balanced Portfolio: 9.15% drawdown.

• Growth Portfolio: 14.17% drawdown.

• Short-Term Corporate Bonds demonstrate typical asset class characteristics with extremely low volatility.

• The Conservative Portfolio achieved the highest Calmar ratio (2.50) significantly outperforming both Bitcoin (0.90) and the S&P 500's (0.32) Calmar ratio.

• The Balanced and Growth Portfolios also demonstrated substantially higher Calmar ratios compared to the S&P 500's (0.32), with values of (1.62) and (1.28) respectively.

• The analysis highlights the potential benefits of systematic rebalancing and diversification across Bitcoin and High-Yield Short-Term Corporate Bonds in mitigating extreme market volatility.

The Magic of Rebalancing:

The Logarithmic Chart illustrates Shannon's Demon, showing how combining Bitcoin with High-Yield Short-Term Corporate Bonds, coupled with disciplined rebalancing, enhances returns while reducing portfolio risk. These strategies' power lies in systematically selling high and buying low through regular rebalancing, effectively capitalizing on Bitcoin characteristic volatility of sharp declines and major rebounds.

Stages of Growth:

1. Initial Decline: Bitcoin drops sharply, reducing its portion of the portfolio.

2. Rebalancing: The portfolio is rebalanced by buying more Bitcoin at a lower price and selling Short-Term Corporate Bonds.

3. Major Rebound: Bitcoin experiences a significant price increase.

4. Profit Taking: Rebalancing now involves selling some Bitcoin and moving funds back to Short-Term Corporate Bonds.

This cycle repeats: driving the portfolio value higher over time.

This systematic approach helps capture gains during Bitcoin's dramatic upswings while limiting exposure during its significant downturns, converting arithmetic returns into higher geometric returns through compound growth. These strategies serve as a compelling reminder that disciplined diversification and consistent rebalancing between Bitcoin and High-Yield Short-Term Corporate Bonds can be particularly valuable.

Important Considerations:

While historical performance demonstrates promise, future results will depend on Bitcoin's evolution and broader market conditions. Investors should carefully evaluate their risk tolerance and financial goals when selecting strategies and ensure thorough due diligence. Our 10-year backtesting analysis provides historical context, but remember that past performance doesn't guarantee future results. As such, the metrics should be treated as rough approximations. This educational material is not financial advice—please consult your financial advisor for personalized guidance.

Portfolio Allocation Analysis: Bitcoin and Short-Term Corporate Bonds

The chart illustrates how varying Bitcoin and Short-Term Corporate Bond allocations impact portfolio performance, using weekly rebalancing intervals. The analysis is based on a 10-year backtest ending on November 8, 2024. The chart compares portfolio returns to the S&P 500's 11.19% annual return during the 10-year backtesting period and shows volatility relative to the S&P 500's weekly price change standard deviation of 2.34% for the same period (October 25, 2014, to November 8, 2024). The chart helps investors visualize how various portfolio compositions align with their risk tolerance and investment goals.

Key Insights from the Chart

Linear Relationship Between Bitcoin and High-Yield Short-Term Corporate Bond Allocation and S&P 500 Volatility/Returns

• The black line represents the nearly linear increase in portfolio volatility as Bitcoin allocation increases.

• The red line shows the relationship between the Bitcoin/Short-Term Corporate Bond portfolios and the S&P 500's annual return over the 10-year backtesting period.

• Each percentage increase in Bitcoin allocation adds approximately 4.3 percentage points of S&P 500-relative volatility. This relationship allows investors to construct portfolios based on their risk appetite.

Strategic Allocation Tiers

The chart highlights specific allocation strategies, each catering to a different risk-reward profile:

Ultra-Conservative (Below 26% Volatility)

• Allocations: 2%-6% Bitcoin and 98%-94% Short-Term Corporate Bonds.

• Volatility: Ranges from approximately 9% to 26% of the S&P 500's weekly standard deviation.

• Returns: Approximately 68% to 97% of S&P 500's annual return over the 10-year backtesting period.

• Insights: Focused on capital preservation with minimal volatility, this approach incorporated modest Bitcoin exposure that significantly enhanced returns relative to traditional conservative portfolios while maintaining excellent stability during the analysis period

Conservative Portfolio (Blue Vertical Line)

• Allocation: 7% Bitcoin and 93% Short-Term Corporate Bonds.

• Volatility: Approximately 30% of the S&P 500's weekly standard deviation (Blue Horizontal Solid Line).

• Returns: Approximately 104% of S&P 500's annual return over the 10-year backtesting period (Blue Horizontal Dashed Line).

• Insights: During the 10-year analysis period, this allocation achieved nearly the same returns as the S&P 500 with just over a quarter of its volatility, demonstrating how risk-averse investors could have obtained market-comparable returns with substantially reduced fluctuations

Balanced Portfolio (Green Vertical Line)

• Allocation: 11% Bitcoin and 89% Short-Term Corporate Bonds.

• Volatility: Approximately 47% of the S&P 500's weekly standard deviation (Green Horizontal Solid Line).

• Returns: Approximately 133% of S&P 500's annual return over the 10-year backtesting period (Green Horizontal Dashed Line).

·       Insights: Throughout the analysis timeframe, this strategy produced returns exceeding the S&P 500 with less than half its volatility, striking an effective balance between growth and stability for investors who sought market-beating performance without excessive risk.

Growth Portfolio (Brown Vertical Line)

• Allocations: 15% Bitcoin and 85% Short-Term Corporate Bonds.

• Volatility: Approximately 65% of the S&P 500's weekly standard deviation. (Brown Horizontal Solid Line).

• Returns: Approximately 162% of S&P 500's annual return over the 10-year backtesting period (Brown Horizontal Dashed Line).

• Insights: Over the 10-year study period, this allocation generated approximately 162% of S&P 500 returns with only 65% of its volatility, showing how growth-oriented investors could have achieved significant outperformance while maintaining moderate risk levels.

High Growth (Above 60% Volatility)

• Allocations: 16%-24% Bitcoin and 84%-76% Short-Term Corporate Bonds.

• Volatility: Ranges from approximately 69% to 103% of the S&P 500's weekly standard deviation.

• Returns: Approximately 169% to 227% of the S&P 500's annual return over the 10-year backtesting period.

• Insights: For high-risk investors seeking high growth potential. During the analysis period, this strategy significantly outperformed the S&P 500, with returns approximately 1.7-2.3 times higher, while volatility ranged from moderately higher to slightly above S&P 500 levels, appealing to those who accepted more short-term fluctuations in exchange for greater long-term gains.

While our analysis focuses on three specific allocation strategies designed for different investor profiles, we tested a full spectrum of Bitcoin allocations ranging from 2% to 24%. The detailed table below provides performance metrics for each allocation percentage, allowing investors to select a custom allocation based on their own assessment of risk tolerance and return objectives. The Conservative, Balanced, and Growth portfolios highlighted throughout this analysis represent notable points on the risk-return spectrum that demonstrated distinct characteristics during our backtesting period.

Investment Implications

The nearly linear trend observed in the chart underscores several key investment strategies:

Customizable Portfolios

• The clear relationship between Bitcoin allocation and portfolio volatility enables investors to tailor portfolios to their volatility targets.

• For example, for someone not averse to volatility, a 24% Bitcoin allocation would have increased portfolio volatility to approximately 103%; this allocation would have returned approximately 227% of the S&P 500 over the 10-year backtesting period.

Dynamic Risk Management

• Investors can adjust Bitcoin and Short-Term Corporate Bond allocations over time to adapt to changing risk tolerance, market conditions, or investment goals.

Discipline in Cryptocurrency Exposure

• Bitcoin's inherent volatility can be mitigated through disciplined portfolio construction. This chart demonstrates that portfolios can incorporate Bitcoin's growth potential without overexposing investors to its risks.

A Word of Caution

The analysis draws from 10-year historical backtesting and serves as a qualitative framework rather than a predictive model. While it offers insights into portfolio allocation strategies, the complex and evolving relationships between Bitcoin and broader economic factors mean past performance cannot guarantee future results. These findings should be viewed as general guidelines rather than definitive recommendations. To maintain relevance, the Bitcoin Criterion backtesting data and analysis will be updated annually each November, incorporating the latest year's data on the anniversary of this website's creation.

Before implementing any investment strategy, consider the following:

• Conduct Independent Research: Take time to understand the underlying assumptions, methodologies, and limitations of any investment approach you're considering.

• Seek Professional Guidance: Consult a qualified financial advisor who can provide personalized recommendations based on your specific circumstances and goals.

• Assess Risk Tolerance: Carefully evaluate your comfort level with market volatility and potential losses, ensuring your investment strategy aligns with your risk profile.

• Review Financial Context: Consider your complete financial picture, including current assets, liabilities, income needs, and long-term objectives.

This information is educational only and not financial advice.

Chart Description: Weekly Real-Time Returns Comparison

The top chart uses a logarithmic scale and includes Bitcoin's performance along with the portfolio strategies and benchmark indices. The bottom chart uses an arithmetic scale and focuses on the Conservative, Balanced, and Growth portfolio strategies compared to just the S&P 500 and High-Yield Short-Term Corporate Bonds, excluding Bitcoin's performance line. All assets start on November 8, 2024, with a base value of $100. Current values as of April 4,, 2025:

Three Simple Choices

• Conservative (7% Bitcoin): The smoothest ride with the lowest volatility.

• Balanced (11% Bitcoin): The middle path with low volatility and growth potential.

• Growth (15% Bitcoin): The boldest option with the highest returns but also the highest risk.

The charts will show you:

• How the returns of the portfolios compare to Bitcoin, the S&P 500, and High-Yield Short-Term Corporate Bonds. Bond returns are based on an average of the yield to maturity across four ETFs: the current year ladder Invesco's BulletShares High-Yield Corporate Bond ETF, BlackRock's iShares High Yield Corporate Bond ETF, and the next fiscal year ladder Invesco's BulletShares High-Yield Corporate Bond ETF and BlackRock's iShares High Yield Corporate Bond ETF.

• How the volatility of the three portfolios compares to Bitcoin and the S&P 500.

• How they handle market ups and downs.

By following the charts you can see which approach might work best for you. Check back each week for updated charts showing how the week went.

To maintain relevance, the Bitcoin Criterion backtesting data and analysis will be updated annually each November, incorporating the latest year's data on the anniversary of this website's creation.

Looking Forward

The convergence of Bitcoin ETFs and Shannon’s portfolio theory presents a powerful opportunity for modern investors. By leveraging innovative assets and time-tested principles, the Bitcoin Criterion offers a structured approach to balancing growth potential with risk management.

Note: this information is educational only and not financial advice. Investors should choose strategies aligned with their risk tolerance and goals, conduct due diligence, and consult with their financial advisor.