How much crypto should be in your portfolio?
Cryptocurrency is a new industry and experts are still figuring out the secrets to a successful portfolio
- What should you take into account?
- Investing a small amount
- A remodel of the 60/40 portfolio
- Which cryptocurrency should you add to a portfolio?
- Final thoughts
As cryptocurrencies have exploded into the mainstream, more investors, from individuals to institutions, are getting serious over digital assets and looking to add bitcoin and other cryptos to their portfolio.
Experts believe this trend is here to stay. A new Bitstamp survey found four out of five institutions think cryptocurrency will overtake traditional investments as a place where people look for returns..
While many investors may be ready to take on digital assets, the industry has frequently proved to be a risky place. So how much cryptocurrency should be in a portfolio?
What should you take into account?
If the highs of 2021 and recent lows of 2022 prove anything, it is that returns on cryptocurrency assets can vary dramatically depending on the exact contitions and forces at play in the markets. This volatility can complicate pinning down an exact amount to add to your portfolio.
In a recent Bloomberg opinion piece, Nir Kaissar, founder of the asset management firm Unison Advisors, said money managers generally attempt, surprise, to maximise gains and minimise losses. This is done through estimating the risk and return of investments based on past performance.
Cryptocurrencies, of course, are lacking price history compared to traditional assets that have been around for some time. Kaissar said this means investors cannot rely on bitcoin’s past performance and “and it almost certainly isn’t indicative of the future.”
He concluded: “With little history and even less insight about what moves cryptocurrencies, investors are left guessing what to expect — and how to blend cryptos with other investments in their portfolios.”
This has not stopped experts and investors coming up with strategies on how much and which cryptocurrencies to add to a portfolio.
Investing a small amount
There is a trend among some experts to propose that cryptocurrency should only make up a small percentage of your portfolio. This means that any risks can be offset by the reliable earnings from most of your assets.
Mark Cuban, the entrepreneur and billionaire, told Vanity Fair in 2017 that only investors wanting to take a risk should consider cryptocurrencies. He suggested that it should take up less than 10% and investors should “pretend you’ve already lost your money”.
This advice falls in line with the approach held by Suze Orman, an American financial adviser. She told Time’s NextAdvisor publication that investing in bitcoin should accompany a recognition that you could lose all of your investment. “I think it should be a part of your portfolio as long as you can afford to lose that money and you’re going to keep it for a seriously long period of time,” she said.
While Orman did not pin down an exact number for the percentage of yopur wealth you should bet on cryptocurrencies, she said: “It depends on how much money are you willing to lose, in my opinion.”
A Yale study from 2019 argued that every portfolio should be made up of between 4% and 6% BTC. Despite the volatility, co-author Aleh Tsyvinski found that cryptocurrencies enjoy a greater return compared to traditional assets.
However, the study only looked at BTC, ETH, and XRP, meaning it is not indicative of wider industry trends.
A remodel of the 60/40 portfolio
For those more bullish about the industry, there are experts giving more adventurous portfolio strategies. Last year, the chief executive of Ark Invest, Cathie Woods, predicted that cryptocurrencies will stabilise and could end up being similar to traditional investments such as bonds.
Woods argued that the classic strategy of 60% equities and 40% bonds needs a rethink. She told BeInCrypto: “You think about the traditional 60/40 stock-bond portfolio, but look what’s happening to bonds right now. If we are ending a 40-year secular decline in interest rates, that asset class has done its thing. What’s next? We think crypto could be the solution.”
She said that digital assets could be the next asset class to see a bull run. As such, Woods suggested investors’ portfolios should be made up of 60% equities, 20% bonds and 20% cryptocurrencies.
It is important to note that this strategy comes with its own risk. It might be worth keeping Orman’s advice in mind and ensure you are willing to lose that 20%.
Which cryptocurrency should you add to a portfolio?
Whether you are investing 1% or 20%, traders will still need to choose which coins will make up their portfolio.
There is a tendency among most experts to recommend the more established coins. Tyson Romanick, portfolio manager at Baker Boyer Bank, based in Walla Walla, Washington, wrote for The Street: “Bitcoin is one of the safer options in the crypto world with its security protocols and decentralization, and is the largest and most established, as well. It is a great starting point for crypto investors.”
Its volatility aside, Bitcoin has proved to be invincible to hackers and has kept its number one market cap status throughout its life. Its first mover advantage has made it a favourable choice among investors.
Other experts keep Bitcoin in mind but recommend a diverse range of coins for a healthy portfolio. Kenneth Rapoza, senior contributor at Forbes, compared the crypto sector to the stock market, because of the overwhelming choice of potential vehicles for investment that consumers have.
He wrote in an article: “Investing in cryptocurrency projects today is a lot like picking stocks. Bitcoin is one thing. But there are the big blockchain protocols, led by Ethereum, and the newcomers who want to compete with Ethereum on price and transaction time.”
Jake Ryan, chief information officer at Tradecraft Capital, a fund management company based in Austin, Texas, said in a blog post that a portfolio made up of between three and nine cryptocurrencies will optimise “risk-adjusted return”. While he did pick specific coins, Ryan said that these coins may no longer be relevant because of the fast-changing environment of the crypto world.
Another way to increase your exposure to multiple coins is through indexes. Just like stocks, investors can invest in a predetermined group of cryptocurrencies. There are many firms offering this with the cryptocurrencies included in different indexes ranging from solana to dogecoin. But this means it is crucial to do your research and fully understand what you are investing in.
Cryptocurrency’s youthful nature is noticeable, as investors are still pinning down a universal strategy that works. However, there is a consensus that investing in coins comes with risk, and a healthy portfolio will need to offset volatility with more stable assets.
Investors may choose to put 10% in a major crypto index or just 1% in bitcoin. Either way, crypto assets are starting to become a staple in a portfolio. But the general advice is the same: traders should never invest more than they can afford to lose and always conduct thorough due diligence.
It depends. Bitcoin is recommended as a safe starting point for investors, due to its first mover advantage. However, other experts such as Kenneth Rapoza compare cryptocurrencies to the stock market and recommend a diverse portfolio.
Remember, crypto is a risky investment and investors should always do their own research before adding it to their portfolio.
The advice will vary among experts. Jake Ryan thinks a healthy portfolio will be made up of between three and nine different coins. A Yale study found a successful portfolio has between 4% and 6% bitcoin.
Cryptocurrencies come with a volatility risk, meaning investors should not add more coins to their portfolio than they can afford to lose.
Cryptocurrency is still a new industry and therefore experts are still figuring out the secrets to a successful crypto portfolio. Some recommend investing a small amount in established coins like bitcoin. Meanwhile, Cathie Woods says it should make up 20% of a portfolio.
Investors should keep in mind Suze Orman’s advice and not invest more than you are willing to lose.