Bitcoin ATM in Miami.
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Bitcoin Prices soar in 2024.
Financial experts say that due to the extreme volatility of Bitcoin and other cryptocurrencies, it typically accounts for only a small portion of an investor’s portfolio – usually no more than 5%.
Some investors may be wise to stay away from it altogether, they said.
“You won’t have the same size distribution of Bitcoin as you did before. Nasdaq or S&P 500 Index” says Ivory Johnson, Washington, D.C.-based certified financial planner and founder of Delancey Wealth Management
“Any time you have a truly volatile asset class, you need to reduce the amount of it in your portfolio to have the same impact as traditional assets like stocks and bonds,” said Johnson, a member of CNBC’s financial advisory board.
Why Bitcoin Price Will Rise in 2024
Bitcoin is the largest cryptocurrency Without a doubt, this is the best-performing investment in 2024. Prices surged about 125% from the $40,000 range at the beginning of the year to around $94,000 by the end of the year.
In comparison, the U.S. stock index S&P 500 rose 23%. The tech-heavy Nasdaq rose 29%.
Prices surged after Donald Trump won the US presidential election. His government is expected to adopt deregulatory policies to stimulate cryptocurrency demand.
A cartoon image of President-elect Trump holding Bitcoin tokens in Hong Kong, China, on December 5, 2024, marking the cryptocurrency’s breakthrough to $100,000.
Justin Chin/Bloomberg via Getty Images
Last year, the SEC also approved for the first time exchange-traded funds for direct investment in Bitcoin and the second-largest cryptocurrency Ethereum, making it easier for retail investors to buy cryptocurrencies.
But experts warn that high profits may mask potential dangers.
“With high returns comes high risk, and cryptocurrencies are no exception,” said Amy Arnott, portfolio strategist at Morningstar Research Services. wrote June.
Arnott wrote that since September 2015, Bitcoin has been nearly five times more volatile than U.S. stocks, while Ethereum has been nearly 10 times more volatile than U.S. stocks.
“A portfolio weight of 5% or less seems prudent, and many investors may want to skip cryptocurrencies entirely,” she said.
BlackRock says 1% to 2% is ‘reasonable’ for Bitcoin
Bitcoin dropped by 64% and 74% respectively Their values are in 2022 and 2018 respectively.
Mathematically, an investor would need a 100% return to recover from a 50% loss.
Arnott said that so far, cryptocurrency returns have been high enough to offset its additional risks, but this pattern will not necessarily continue.
You won’t have the same size allocation to Bitcoin as the Nasdaq or the S&P 500.
Ivory Johnson
CFP, founder of Delancey Wealth Management
Arnott writes that there are several reasons for this: As cryptocurrencies have become more mainstream, their value as a portfolio diversification tool has decreased. Its popularity among speculative buyers also “makes it susceptible to pricing bubbles that eventually burst,” she added.
Money management firm BlackRock believes that for investors who are comfortable with “the risk of a potential rapid price collapse” and believe Bitcoin will become more widely adopted, diversified It makes sense to have Bitcoin in your investment portfolio. wrote Early December.
(BlackRock offers Bitcoin ETFs, iShares Bitcoin Trust, and IBIT.)
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Target-date funds are not for everyone
BlackRock experts wrote that a 1% to 2% allocation to Bitcoin is a “reasonable range.”
Beyond that range, Bitcoin’s share of total portfolio risk would “increase dramatically,” they said.
For example, BlackRock estimates that a 2% allocation to Bitcoin represents approximately 5% of the risk of a traditional 60/40 portfolio. But it said a 4% allocation would bring that figure to 14% of total portfolio risk.
More “speculation” than investment?
In contrast, Vanguard Group, another asset manager, currently has no plans to launch a cryptocurrency ETF or offer one on its brokerage platform, officials said.
“From Vanguard’s perspective, cryptocurrencies are more of a speculation than an investment,” said Janel Jackson, former global head of ETF capital markets and broker and index relations at Vanguard. wrote January 2024.
Stock investors own shares of companies that produce goods or services, and many investors receive dividends; bond investors receive periodic interest payments; Commodities are physical assets that satisfy consumer demand, Jackson writes.
“While cryptocurrency has been classified as a commodity, it is an immature asset class with little history, no intrinsic economic value, no cash flow, and can wreak havoc in investment portfolios,” said the firm’s current writes Jackson, a senior executive at Financial Advisor Services.
average cost and hold for the long term
Financial advisors say that ultimately, one’s total cryptocurrency allocation depends on an investor’s interest and ability to take risk.
Douglas Boneparth, CFP in New York and a member of CNBC’s advisory board, said: “Younger, more active investors may be allocating more (to cryptocurrencies) in their portfolios.”
Boneparth, president and founder of Bone Fide Wealth, said investors typically hold about 5% of their classic 80/20 or 60/40 portfolios in cryptocurrencies.
“I think it’s probably a good idea to hold some Bitcoin in your portfolio, but it’s not for everyone and Bitcoin will still be volatile,” Bonepas said. “As with other cryptocurrencies, it’s difficult to determine which ones will be a good long-term investment. That’s not to say there won’t be winners.”
Delancey Wealth Management’s Johnson said investors looking to buy cryptocurrencies should consider using a dollar-cost averaging strategy.
“I buy 1% at a time until I reach my target risk,” Johnson said. “That way I don’t put in 3%, 4%, 5% all at once and then have a sharp decline.”
Johnson said it would also be prudent for investors interested in cryptocurrencies to buy and hold cryptocurrencies for the long term, just as they would other financial assets.
Arnott wrote that Morningstar recommends holding cryptocurrencies for at least 10 years.
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