Grayscale: BTC can replace some investments in Nasdaq 100

Nasdaq 100 Index and Bitcoin: Complementary Investment Strategy

Although the investment attributes are very different, the Nasdaq 100 Index and Bitcoin can form a complementary investment portfolio. The Nasdaq 100 index covers the largest non-financial tech stocks on the Nasdaq Exchange, and Bitcoin, as the first public blockchain, has now become the most valuable crypto asset. Both represent high growth potential in the wave of digital economy transformation.

There are moderate correlations in yields, but the volatility difference is significant. From 2019 to the present, the correlation between Bitcoin's monthly yield and the Nasdaq 100 index is about 40% (Figure 1). Bitcoin’s annualized volatility is as high as 71.5%, while the Nasdaq 100 index is only 20.5%. However, long-term investors often get higher returns through the high risk of Bitcoin. During this period, the cumulative return rate of Bitcoin was almost ten times that of the Nasdaq 100 index (the Nasdaq 100 index rose about 3 times, and Bitcoin rose about 30 times). The Sharpe ratio for both is 1.0.

Figure 1: From 2019 to the present, Bitcoin and the Nasdaq 100 index have a correlation of about 40%, with a difference of about 10 times the rate of return

Based on the above characteristics, moderate allocation of Bitcoin and cash in the investment portfolio holding the Nasdaq 100 index can increase expected returns, reduce risks or exceed the "effective frontier" (that is, increase expected returns without increasing volatility). For example, transferring 10% of the Nasdaq 100 index configuration to the Bitcoin and cash combination may have the following effects: [3]

• Enhance expected returns: Suppose that the portfolio is allocated 90% of the Nasdaq 100 index and 10% is allocated to Bitcoin, the annualized return will increase from 22.2% to 28.8%, the annualized volatility will increase from 20.5% to 22.4%, and the Sharpe ratio will increase from 1.0 to 1.2 (Figure 2). This shows that Bitcoin allocation increases risks and returns and brings certain diversification advantages and higher Sharpe ratios.
• Reduce risks without sacrificing returns: Suppose the portfolio is allocated 90% of the Nasdaq 100 index, 3% is allocated Bitcoin, and 7% is allocated cash, the annualized return will reach 22.9%, the volatility will drop to 19.4%, and the Sharpe ratio will be 1.1. This means that while slightly improving returns, portfolio volatility is significantly reduced. This reflects the high risk and high return characteristics of Bitcoin and improves the capital efficiency of the investment portfolio.
• Beyond the effective frontier: Nasdaq 100 investors can go beyond the effective frontier by adjusting the allocation ratio of Bitcoin and cash (or low-volatility stocks). For example, suppose that the portfolio is 90% configured with the Nasdaq 100 index and 5% configured with Bitcoin and cash respectively, the annualized yield will reach 24.6% and the volatility will be 20.2%. This means that with largely unchanged volatility, the annualized rate of return is about 2% higher than investing in the Nasdaq 100 alone.

Before investing in cryptocurrencies, investors need to fully consider their own situation and financial goals. Cryptocurrencies are high-risk assets and are not suitable for short-term funding needs and/or risk aversion investors. But for investors pursuing high-growth innovative technology investments, Bitcoin can supplement existing allocations such as the Nasdaq 100 index and reduce concentrated risks to U.S. stocks.

Figure 2: Assumptions of adding Bitcoin to the Nasdaq 100 index configuration

Note:

[1] Data source: Artemis. Data is as of January 31, 2025.

[2] Data source: Bloomberg, Grayscale Investments. Based on monthly earnings data ended January 31, 2025. Past performance does not represent future results.

[3] All results are based on monthly earnings data from January 2019 to January 2025.

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