While cryptocurrencies like Bitcoin can deliver outsized returns, they can also result in outsized losses. Even a small allocation to the digital token can completely change the risk profile of an investment portfolio, according to Lombard Odier.
In 2024, Bitcoin traded at $100,000 for the first time ever, generating about 120 percent in annual returns. This was partly driven by a late year rally with optimism in Donald Trump’s future implementation of pro-crypto policies in the US.
Despite the hype, Lombard Odier warns investors against being excessively positive on the digital token, highlighting risks such as volatility and intense energy usage.
«Our view is that cryptocurrencies are investment vehicles as demonstrated by their increased use and capitalization, but they are not assets or a store of value comparable to those we hold in our strategic asset allocations,» the bank said in a report. «We therefore do not include cryptocurrencies in our asset allocations.»
High Volatility
While Bitcoin can generate outsized returns, it can also swing the other way. Since the mid-2010s, the cryptocurrency has averaged annual realized returns of almost 170 percent with 109 percent annual volatility, exceeding the volatility of traditional financial assets.
«As a result, even a small Bitcoin allocation of 2 percent can dramatically change a portfolio’s overall volatility, accounting for an equivalent of the volatility from all of a portfolio’s US equity market positions,» the report explained.
«Increasing a Bitcoin allocation to 5 percent of a ‘balanced’ portfolio completely changes its risk profile, raising volatility by one-third. In the case of a 10 percent Bitcoin allocation, the overall volatility of the portfolio is multiplied around two times, and the cryptocurrency contributes two-thirds of this risk. The profile is therefore changed entirely, bringing the portfolio closer to the risk of a growth strategy.»
Energy Usage and Other Risks
In addition to volatility, Lombard Odier also underlined the issue of excessive energy usage. According to PwC, electricity demand for crypto mining has risen ten times in the last five years to reach 129 terawatt hours per year, the equivalent of electricity consumption in all of Finland.
Other risks include the safety of cryptocurrency wallets and the use of crypto for illicit or criminal activities.
2025 Outlook
While Lombard Odier does not forecast Bitcoin prices, its technical analysis indicates that there are technical support levels at $88,740 and $78,705 with technical resistance at $102,145 followed by $106,975.
«Mr. Trump’s election, and his appointments of cryptocurrency supporters to key posts in his administration, may well lead to more supportive US institutional frameworks, and the wider use of cryptocurrencies for payments and settlements. Lower interest rates in 2025 will also likely support prices,» the bank added.
«However, a supportive environment does not mean that volatility has evaporated and that risks have subsided. Investors who decide to hold cryptocurrencies should in particular be suitably cautious about how much weight they give to them in their portfolios, given the potential that cryptocurrencies have to upset the balance of risk in any multi-asset portfolio.»
