Bitcoin plus Harry Brown’s Permanent Portfolio – A mix in heaven?

  • What would happen if you took $5,000 out of your $100,000 permanent portfolio and allocated it to Bitcoin?
  • From 3.6% annual to 15% annual returns?

Got to love the Permanent Portfolio

I have been somewhat obsessed with the simplicity and fundamental thinking behind the permanent portfolio. I have written and analyzed it various times (here and here ) a well as created variations from it that are still running live, like the BUG and the Enhanced Permanent Portfolio. You can find these at Logical-Invest.com

Enter Bitcoin

Adding Bitcoin to the Permanent Portfolio sounds very natural to me:

  1. It is a safe-haven asset that does well in periods of distress, wars, market crashes, etc.
  2. Like gold, it is an insurance against economic system failure like bank runs or black-swan market events.
  3. Even better, it has no custodian, can be accessed from anywhere in the world (say in case you need to leave because of war, a dictatorship) and cannot be censored*.
  4. It is extremely inflation resistant, in case governments and central banks decide to deflate your savings away.
  5. It has ‘upside risk’, meaning the risk is that it can go up very fast rather than down, which is different from the equity markets. This makes it uncorrelated in an interesting way.

The Backtests

The PP – Permanent Portfolio – 2015-2019

Mr. Brown’s original allocations. We will call this portfolio the “PP”.
25% Gold, 25% Bonds, 25% Equity and 25% Cash
$5 /trade fee and yearly rebalance, no interest on cash.

Initial capital 100000.00
Ending capital 119860.77
Net Profit 19860.77
Net Profit % 19.86%
Exposure % 73.92%
Net Risk Adjusted Return % 26.87%
Annual Return % 3.69%
Risk Adjusted Return % 4.99%
Transaction costs 150.00

The BPP – Bitcoin Permanent Portfolio – 2015-2019

We call this allocation the “BPP”.

THE BPP:

Allocation Rules:
5% in Bitcoin, 25% in SPY, 25% in TLT and 25% in GLD.

In other words for a $100,000 investment you are ‘risking’ $5,000 in case Bitcoin goes to zero. This $5,000 theoretical risk would have tripled your (alas, theoretical/backtested) returns!

Initial capital 100000.00
Ending capital 203444.61
Net Profit 103444.61
Net Profit % 103.44%
Exposure % 80.53%
Net Risk Adjusted Return % 128.45%
Annual Return % 15.25%
Risk Adjusted Return % 18.94%
Transaction costs 200.00

The comparison of course, is unfair. 2015-2017 were the great years of Bitcoin! – What about the 2018-2019, Bitcoin’s bear market years?

The PP – 2018-2019 :

Initial capital 100000.00
Ending capital 110415.37
Net Profit 10415.37
Net Profit % 10.42%
Exposure % 73.92%
Net Risk Adjusted Return % 14.09%
Annual Return % 5.09%
Risk Adjusted Return % 6.89%
Transaction costs 60.00

The Bitcoin PP (BPP) – 2018-2019

Initial capital 100000.00
Ending capital 110172.26
Net Profit 10172.26
Net Profit % 10.17%
Exposure % 80.27%
Net Risk Adjusted Return % 12.67%
Annual Return % 4.96%
Risk Adjusted Return % 6.18%
Transaction costs 80.00

Not bad for 2018 being the worst year for Bitcoin.

Conclusion

Allocating just 5% of your Permanent Portfolio to Bitcoin can boost yearly returns by more than twice. For every $100K invested, the risk that comes from Bitcoin going to zero is $5k. The benefits, in case of a new bull market, may be much greater.


Notes: Both portfolios leave a lot of money in cash, 25% for the PP and 20% for the BPP. There are additional ways to enhance returns by utilizing this cash. Some we have shown in our Enhance Permanent Portfolio and BUG implementation. Another solution is to use interest-bearing digital cash like DAI or USDC via DeFi solutions like Compound, Nexo, Celsius, Nuo, BlockFi, etc. Other solutions are emerging including investing into actively managed strategies as a coin: More on tokensets.com.

*The 2nd largest central bank (ECB) forced Cypriot and Greek banks into closing and later placed withdrawal limits into normal people’s accounts.

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