Bitcoin Barbell Strategy Explained: Muscle Up Your Portfolio
There’s a lot to be said about spreading your investment portfolio across many different baskets. But the barbell strategy takes a different approach. It splits an investment portfolio into just two weights on either side: the “risky” side (stocks) and the “safe” side (bonds). In this post, I’ll explain how the barbell strategy might work when one of those sides is bitcoin.
How the traditional barbell portfolio works with stocks and bonds
Nassim Nicholas Taleb made the barbell strategy popular in his 2012 book, Antifragile: Things That Gain From Disorder. The basic idea is that you put more of your portfolio into a “safe” investment and less into a “risky” one. This way, you get a steady portfolio that can grow in the good times and hunker down in the bad.
But unlike multi-asset portfolios (e.g. Ray Dalio’s All Weather investing strategy), the barbell approach has just two assets. These assets are on opposite ends of the risk spectrum. There’s nothing in the middle.
The table below shows what a typical barbell strategy portfolio might look like. I’ve also included ETFs for each investment to show how investors could replicate it in real life:
| Investment risk | Investment type and potential performance | ETF (Exchange Traded Fund) option |
|---|---|---|
| Safer (70% to 90%) | Investment grade bonds. Lower volatility and lower returns. | iShares Core U.S. Aggregate Bond ETF (AGG) |
| Higher risk (10% to 30%) | Growth stocks. Higher volatility and higher returns. | Invesco QQQ Trust (QQQ) |
Next, I’ve used Portfolio Visualizer software to backtest what would have happened if you’d invested $10,000 into a traditional barbell portfolio (green) over the past 20 years. For this particular strategy, I’ve assumed 20% in QQQ (Nasdaq growth stocks ETF) and 80% in AGG (investment-grade bonds ETF).
As you can see, the barbell strategy is somewhere in the middle in terms of risk and return. And that’s the general idea of the strategy. I’ve also assumed that the barbell portfolio is rebalanced once per quarter to get it back to its original 20% QQQ and 80% AGG split. You can learn more about portfolio rebalancing here.
The table below breaks the results down more.
Barbell strategy results: AGG and QQQ:
| Metric | Invesco QQQ Trust (QQQ) | iShares Core US Aggregate Bond ETF (AGG) | Barbell strategy: 20% QQQ and 80% AGG | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Start balance | $10,000 | $10,000 | $10,000 | |||||||||
| End balance | $128,162 | $16,796 | $26,897 | |||||||||
| Yearly return (CAGR) | 13.54% | 2.62% | 5.05% | |||||||||
| Standard deviation (risk) | 18.27% | 4.28% | 5.48% | |||||||||
| Best year | 54.68% | 8.45% | 15.59% | |||||||||
| Worst year | -41.73% | -13.03% | -17.06% | |||||||||
| Biggest drawdown | -49.74% | -17.14% | -18.29% | |||||||||
| Sharpe ratio (return over risk) | 0.71 | 0.30 | 0.67 | |||||||||
| Stock market correlation | 0.91 | 0.18 | 0.72 |
What about the bitcoin barbell strategy?
Die-hard bitcoin believers might say it’s safer to keep your money in bitcoin than in the US investment-grade bond market. But bitcoin can move 10% in a day without breaking a sweat, while the bond market rarely does that in a year. In the long run, I believe bitcoin will massively outperform bonds as an investment. But when it comes to volatility, bitcoin is still the head honcho.
So on that note, I’ve put bitcoin on the risky side (20%) in place of QQQ for my back-test – and kept 80% in AGG. To make the results look more realistic, I’ve back-tested this strategy from December 2017, when bitcoin was around $10,000. This time period also includes two painful bitcoin bear markets for good measure. Again, I’ve rebalanced the portfolio quarterly.
The next table shows the results in more detail. Interestingly, the bitcoin barbell strategy grew more than the Vanguard 500 Index (tracks US stock market) over the time frame measured. And with similar levels of volatility. Not too shabby.
Bitcoin barbell strategy results:
| Metric | iShares Core US Aggregate Bond ETF (AGG) | Barbell strategy: 20% bitcoin and 80% AGG | Vanguard 500 Index |
|---|---|---|---|
| Start balance | $10,000 | $10,000 | $10,000 |
| End balance | $9,783 | $18,775 | $17,512 |
| Yearly return (CAGR) | -0.37% | 11.23% | 9.93% |
| Standard deviation (risk) | 5.38% | 18.23% | 17.80% |
| Best year | 8.45% | 55.76% | 31.33% |
| Worst year | -13.03% | -23.49% | -18.23% |
| Biggest drawdown | -17.14% | -28.41% | -23.95% |
| Sharpe ratio (return over risk) | -0.37 | 0.58 | 0.52 |
| Stock market Correlation | 0.38 | 0.42 | 1.00 |
What’s the takeaway here?
The traditional barbell strategy is not something I would use personally. While it’s quite stable in terms of volatility, the returns just don’t cut it in the long run. Of course, for someone closer to retirement, it might be a sensible option. You can read more about how to invest for retirement here.
Then there’s the bitcoin barbell strategy. This is a simple strategy that someone further from retirement might be on board with. You could also replace bonds with gold.
On that front, here’s another post I wrote earlier this year, testing 50% in gold and 50% in bitcoin.
The usual disclaimer: none of this is investment advice. It’s just my analysis of an investment strategy.
