CONTRIBUTORS
Max Gokhman, CFA
Head of AI & Digital Asset Solutions
Franklin Templeton Investment Solutions
Lisa Wang, CFA
Head of EMEA Investment Strategy
Franklin Templeton Investment Solutions
Seth Ginns
Chief Investment Officer
Franklin Crypto
Soumil Jain, CFA, FRM, CAIA
Senior Quantitative Research Analyst
Franklin Crypto
Executive Summary
In March 2025, we argued that investors who want digital assets should put them in the benchmark, size them by risk contribution rather than by notional weight and keep allocations below 20% of total portfolio risk. We also wrote that contribution to risk would vary over time as the asset class evolved. Eighteen months later, we now return to the data to ask how much it has evolved and what that means for allocators. This time, we include a greater focus on institutional portfolios that also incorporate illiquid private and liquid alternative asset classes.
Key Findings
Bitcoin’s return distribution has compressed. Annualized daily volatility has fallen from ~84% in 2017–2019 to ~46% since mid-2024, and the average loss on the worst 5% of days has halved, from -9.9% to -5.0%. This is consistent with the institutionalization we anticipated: deeper derivatives and exchange-traded fund (ETF) infrastructure and a larger base of long-horizon holders. That said, bitcoin remains volatile and prone to large drawdowns; the current era still includes a 53% peak-to-trough decline.
Correlations with traditional assets have retreated from their 2022–2024 highs, but they are regime-dependent. Bitcoin’s correlation to global equities is highest when equities are in a negative regime (roughly 0.4–0.5 since 2020) and lowest when equities are strong (0.1–0.3). For prudent dynamic allocators this implies that funding for digital assets should continue to come from other high-risk assets but also points to their increasingly diversifying quality.
The same 20% risk ceiling now accommodates a 7.5% allocation. In a diversified institutional portfolio (45% global equity, 25% US bonds, 12% private equity, 10% real estate, 8% hedge funds), a 7.5%bitcoin allocation funded pro rata contributes 20% of total portfolio risk. In our 2025 paper, 3% in a 60/40 portfolio contributed 11.4%; today, with volatility bands continuing to shrink, 3% in the same 60/40 portfolio contributes just 6.5%.
Across 12 macro and crypto-specific shocks since 2020, bitcoin’s first-week behavior has been mixed and its two-month recovery has been consistently stronger than equities. In the one true liquidity shock in our sample (COVID-19), bitcoin fell twice as far as equities in the first week and its equity correlation doubled. During the 2023 banking crisis, the 2025 tariff shock and the 2026 US-Iran conflict, bitcoin outperformed equities in the first week as well as over a 60-day period. The direction of each correlation change is explainable by the nature of the event, which implies that allocators can make informed Dynamic Asset Allocation (DAA) decisions for crypto assets based on their macro forecasts.
Risk budgets should be actively monitored. While peak risk contributions have fallen in each successive cycle, the asset class remains prone to volatility spikes. We recommend risk-contribution ceilings as rebalancing triggers, reviewed at least quarterly. The same discipline applies to private and alternative allocations whose risk is understated by smoothed valuations.
How This Paper Is Organized
We follow the logic of an allocator approaching a new asset class. Section 1 asks what bitcoin represents in a portfolio, because sizing depends on the role you expect it to play. Section 2 shows how the asset’s statistical character has evolved, because those figures are the core inputs into allocation formulas. Section 3 applies our risk-contribution framework to a diversified institutional portfolio and reconciles the result with our 2025 paper. Section 4 tests the framework against real shocks. Section 5 covers monitoring and rebalancing. A sidebar outlines further ideas for the digital asset sleeve itself. The Notes and Index Definitions section at the end covers the data points mentioned throughout this paper.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
ETFs trade like stocks, fluctuate in market value and may trade at prices above or below their net asset value. Brokerage commissions and ETF expenses will reduce returns. ETF may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.
Blockchain and cryptocurrency investments are subject to various risks, including inability to develop digital asset applications or to capitalize on those applications, theft, loss, or destruction of cryptographic keys, the possibility that digital asset technologies may never be fully implemented, cybersecurity risk, conflicting intellectual property claims, and inconsistent and changing regulations. Speculative trading in bitcoins and other forms of cryptocurrencies, many of which have exhibited extreme price volatility, carries significant risk; an investor can lose the entire amount of their investment. Blockchain technology is a new and relatively untested technology and may never be implemented to a scale that provides identifiable benefits. If a cryptocurrency is deemed a security, it may be deemed to violate federal securities laws. There may be a limited or no secondary market for cryptocurrencies.
Commodity-related investments are subject to additional risks such as commodity index volatility, investor speculation, interest rates, weather, tax and regulatory developments.
Digital assets are subject to risks relating to immature and rapidly developing technology, security vulnerabilities of this technology, (such as theft, loss, or destruction of cryptographic keys), conflicting intellectual property claims, credit risk of digital asset exchanges, regulatory uncertainty, high volatility in their value/price, unclear acceptance by users and global marketplaces, and manipulation or fraud. Portfolio managers, service providers to the portfolios and other market participants increasingly depend on complex information technology and communications systems to conduct business functions. These systems are subject to a number of different threats or risks that could adversely affect the portfolio and their investors, despite the efforts of the portfolio managers and service providers to adopt technologies, processes and practices intended to mitigate these risks and protect the security of their computer systems, software, networks and other technology assets, as well as the confidentiality, integrity and availability of information belonging to the portfolios and their investors.
Investment strategies involving private markets (such as private credit, private equity and real estate) are complex and speculative, entail significant risk and should not be considered a complete investment program. Such investments viewed as illiquid and may require a long-term commitment with no certainty of return. Depending on the product invested in, such investments and strategies may provide for only limited liquidity and are suitable only for persons who can afford to lose the entire amount of their investment. Private investments present certain challenges and involve incremental risks as opposed to investments in public companies, such as dealing with the lack of available information about these companies as well as their general lack of liquidity. There also can be no assurance that companies will list their securities on a securities exchange, as such, the lack of an established, liquid secondary market for some investments may have an adverse effect on the market value of those investments and on an investor's ability to dispose of them at a favorable time or price.