By Suzanne McGee

(Reuters) -BlackRock recommends that interested investors consider allocating as much as 2% of their portfolio to bitcoin, the world's largest cryptocurrency, the giant asset manager said in a report on Thursday.

"We see a case for investors with suitable governance and risk tolerance to include bitcoin in a multi-asset portfolio," a team of four senior BlackRock executives including Samara Cohen, chief investment officer of ETFs and Paul Henderson, senior portfolio strategist of BlackRock Investment Institute, said in the short report.

The arguments in favor of those with an interest in bitcoin to include it in an asset allocation model include the fact that it is likely to be less correlated with other major asset classes and could offer a diversified source of return.

"Investors should also be alert to bitcoin's risks," the report cautioned. "It may not ultimately achieve broader adoption. And it remains highly volatile and vulnerable to sharp selloffs." In addition, there have been times when its returns have been more closely tied to those of stocks and other risk assets, meaning investors might not be able to count on it serving as a hedge.

BlackRock was one of 10 companies to launch new exchange-traded products tied to bitcoin in January in what has been the most successful ETF launch in the history of those products, with more than $100 billion in assets, according to data from VettaFi.

The lion's share of those assets have flowed to BlackRock's iShares Bitcoin Trust, which now has $51.1 billion in assets.

BlackRock said it based its allocation recommendation on gauging how much the addition of bitcoin to a portfolio would raise its overall risk. While the report's authors said that bitcoin is a unique asset, it is in some ways similar to the group of giant technology companies, including Nvidia and Microsoft, that have come to be known as the Magnificent 7.

Those companies, whose big gains on Wednesday played a major role in propelling the Nasdaq Composite Index to a new record above 20,000, have an average market capitalization of $2.5 trillion, close to the $2 trillion or so for bitcoin, BlackRock said. Having significant exposure to these companies can be similar to owning bitcoin in terms of overall portfolio risk, the firm said.

But BlackRock cautioned that above the 2% maximum recommended weight, "bitcoin’s share of total portfolio risk becomes outsized compared with the average magnificent 7 stock."

BlackRock's report also flagged the need by investors to regularly review "bitcoin's changing nature", including the pace at which it is adopted by institutional investors, its correlation to stocks and its volatility.