Grayscale: BTC can replace some Nasdaq 100 investments

Nasdaq-100 stocks and Bitcoin are distinct but complementary portfolio investments. The Nasdaq-100 Index consists of the largest non-financial stocks listed on the Nasdaq exchange with a high concentration of technology stocks. Bitcoin is the first public blockchain and is today the largest crypto asset by market capitalization. [1] Both the Nasdaq-100 Index and Bitcoin can be viewed as high-growth investments at the forefront of the digital transformation of the economy. Replacing a portion of Nasdaq-100 stock investments with Bitcoin in a portfolio would allow investors to reduce U.S. equity concentration risk and may help optimize risk-adjusted returns.

Nasdaq 100 returns and Bitcoin returns have a moderate correlation, with a significant difference in volatility. Since 2019, Bitcoin’s monthly returns have been correlated with Nasdaq 100 returns by about 40% (Figure 1). Over the same period, the annualized volatility of Bitcoin’s returns has been 71.5%, while that of the Nasdaq 100 has been 20.5%. However, investors who hold Bitcoin for many years generally compensate Bitcoin’s higher risk with higher returns. Over this period, Bitcoin’s cumulative returns have been almost 10 times higher: the Nasdaq 100 has risen by about 3 times, while the price of Bitcoin has risen by about 30 times. The Sharpe ratio for both Bitcoin and the Nasdaq 100 is 1.0. [2]

Figure 1: Since 2019, Bitcoin has a correlation of about 40% with the Nasdaq, with returns about 10 times higher

Given these properties, an allocation to Bitcoin and cash in a portfolio with a Nasdaq 100 position could potentially be used to increase expected returns, reduce risk without sacrificing expected returns, or move beyond the “efficient frontier” — that is, achieving higher expected returns without increasing volatility. As a hypothetical example, we consider here the potential impact on a portfolio of moving 10% of the allocation from the Nasdaq 100 to a combination of Bitcoin and cash. [3]

• Bitcoin may improve expected returns. Since 2019, the Nasdaq 100 has an annualized return of 22.2%, an annualized volatility of 20.5%, and a Sharpe ratio of 1.0. Assuming a portfolio with 90% allocated to the Nasdaq 100 and 10% allocated to Bitcoin, the annualized return is 28.8%, the annualized volatility is 22.4%, and the Sharpe ratio is 1.2 (Figure 2). In other words, a Bitcoin allocation will shift the portfolio to a higher risk and return combination, with some diversification advantages and a slightly higher Sharpe ratio.

• Bitcoin reduces risk without sacrificing expected returns. Alternatively, we can consider a portfolio that is allocated to both Bitcoin and cash to reflect Bitcoin’s higher volatility. For example, since 2019, a portfolio with 90% allocation to the Nasdaq 100, 3% to Bitcoin, and 7% to cash would have returned an annualized 22.9% with a volatility of 19.4% and a Sharpe ratio of 1.1 — i.e., slightly higher returns for significantly lower portfolio volatility. This result reflects that Bitcoin offers both higher risk and higher expected returns, and therefore can improve a portfolio’s capital efficiency (similar to the strategic use of leverage).

• Bitcoin is used to move outside the efficient frontier. Different combinations of Bitcoin and cash (or relatively low-volatility stocks) may allow Nasdaq 100 investors to move outside the efficient frontier — that is, to achieve higher expected returns without increasing volatility. For example, since 2019, a hypothetical portfolio of 90% in the Nasdaq 100 and 5% each in Bitcoin and cash would have achieved an annualized return of 24.6% with an annualized volatility of 20.2%. In other words, assuming a balanced portfolio of Bitcoin and cash, the annualized return would be about 2% higher than investing in the Nasdaq 100 alone, with comparable volatility.

Investors should consider their own circumstances and financial goals before investing in cryptocurrencies. The asset class should be considered high risk and may not be suitable for investors with short-term capital needs and/or high risk aversion. However, for investors seeking high-growth innovative technology investments, Bitcoin may complement existing allocations such as the Nasdaq 100 stocks and may help investors reduce their exposure to U.S. stock concentration risk.

Chart 2: Hypothetical impact of adding Bitcoin to the Nasdaq 100 index allocation

Notes

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

[2] Source: Bloomberg, Grayscale Investments. Based on monthly returns through January 31, 2025. Past performance is not indicative of future results.

[3] All results are based on monthly returns between January 2019 and January 2025.