The timing is everything when it comes to incorporating crypto into your investment portfolio.
According to a report by the CFA Institute Research Foundation, Bitcoin had a positive impact on a diversified portfolio from January 2014 to September 2020. A quarterly rebalances of 2.5% allocation to Bitcoin improved returns from a traditional portfolio by nearly 24%.
There is such a huge impact from a tiny allocation. In addition, Bitcoin appreciated by approximately 2,875% during this period.
You should be very cautious when reading findings like this, which can make it seem like the more crypto you own, the better. Early adopters are the only ones who benefit from that – for example, adding the same amount of crypto in December 2020 would have had just about no impact on July 2022.
It’s easy to get too much of a new thing, and that’s especially true of cryptocurrency. Our next step is to determine how much crypto you should have in your portfolio.
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How Much Crypto Should You Own?
Cryptocurrencies should not make up more than 5% of your portfolio, according to most experts.
Bruno Ramos de Sousa, head of global expansion at hashdex, says this amount is “small enough to maintain comfort in periods of high volatility, but large enough to have an impact on the portfolio if crypto prices rise.”
According to Aaron Samsonoff, co-founder and chief strategy officer of InvestDEFY, allocations up to 20% are acceptable. In the end, your risk tolerance and beliefs about crypto determine how much crypto you should have in your portfolio.
In addition to outsized long-term returns, cryptocurrencies tend to have excessive volatility.
The CFA Institute study found that Bitcoin allocations were associated with higher returns and greater volatility. An annual return of 8.6% was produced by the traditional portfolio without Bitcoin allocation between January 2014 and September 2020, whereas a return of 6.26% was achieved by the traditional portfolio with a 2.5% allocation, which experienced increased volatility as well.
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“Considering the outsized returns and significant risks of this emerging asset class, a very small allocation is sufficient,” says Ric Edelman, who founded the Digital Assets Council of Financial Professionals.”
If your cryptocurrency investment declines significantly or even falls to zero, even a small amount can improve your overall returns without causing financial harm.
“Callie Stillman, a partner at Lift Financial, says adding some to your portfolio can be a great way to take advantage of long-term gains while knowing that if you don’t make it big, you aren’t out your whole portfolio.
What Should My Crypto Portfolio Look Like?
After deciding how much cryptocurrency to own, you must decide which crypto assets to buy and how much to hold.
Edelman recommends four crypto portfolio options. As a first step, you could only own Bitcoin. In terms of market dominance, it’s the oldest and largest crypto asset.
“Institutions typically buy only Bitcoin when investing. While it might not produce the highest gains, it will be the last to go to zero,” he explains.
To capture the full crypto opportunity set, you need to diversify your position as Bitcoin’s market dominance fades, says Martin Leinweber, digital asset product strategist at MarketVector Indexes.
“The return patterns of different assets differ notably, and they respond heterogeneously to Bitcoin pullbacks,” says Leinweber. “Despite short-term correlations, Bitcoin has no relationship with gaming tokens like Axie Infinity or exchange tokens like Binance Coin (BNB).”
The second largest cryptocurrency by market cap, Ethereum, has 18% market dominance, making it a popular alternative to Bitcoin. “Many believe the technology has far greater utility for global commerce, so it will continue to gain popularity,” Edelman says. In addition to Ethereum, there are many other coins and tokens that use the Ethereum blockchain.
Alternatively, you could have a portfolio that includes both Bitcoin and Ethereum. “Edelman describes them as the Coca-Cola and Pepsi of crypto. Over 60% of crypto’s market share is accounted for by the two of you.
Edelman recommends a 50-50 split or 60-40 split in favor of your preferred coin. “Also, you’re making a big wager,” and “bets should be avoided since this asset class is already quite risky.”
Leinweber says that while larger coins like Bitcoin and Ethereum may make up a larger percentage of your portfolio, keeping smaller proportions of other crypto assets can improve your long-term returns.
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Check Out Crypto ETFs
Investing in crypto does not have to be restricted to directly owning crypto. ETFs that track Bitcoin and blockchain technologies provide a simple way to get crypto exposure.
BITW, an exchange-traded fund based on the market capitalizations of the 10 largest cryptocurrencies, is recommended by Edelman. A fund that is market cap-weighted makes up more than 90% of its portfolio and is dominated by Bitcoin and Ethereum.
“Samsonoff advises passive crypto investors to focus on Bitcoin, Ethereum, or crypto index funds. “In my opinion, single-name blockchains still have a lot of tail risk, and unless you are a researcher actively involved in the space, you won’t outperform Bitcoin, Ethereum, or an index.”
A multi-token fund replicating a market cap-weighted index is the best way to ensure you get a return on the crypto market.
He explains that the fund manager buys the winners and sells the losers on your behalf, exactly as the index is replicated on your behalf.
Rather than buying cryptocurrencies directly, some crypto ETFs invest in companies engaged in the crypto industry, such as Coinbase, Silvergate Bank, and Riot Blockchain.
A number of investment companies also offer separately managed accounts (SMAs), which are similar to personalized mutual funds that own a number of different cryptocurrencies.
“The account is managed especially for you, so you can rebalance and use tax losses in a way that funds can’t help with,” Edelman says. SMAs usually have tens of thousands of dollar investment minimums, which are a challenge to investors.
The Composition of a Good Crypto Portfolio
In Stillman’s opinion, crypto investments should be treated the same as any other investments in your portfolio. Your portfolio should be diversified and match your risk tolerance.
It is best to invest in cryptocurrencies that you have researched and that you feel comfortable with. “For more information about how they work and their objectives, read their whitepapers. “Investigate the background of the company and know their track record.”
It’s important to ask yourself why you’re buying crypto and what you plan to do with it. Why are you buying? Was it recommended to you by a friend? Is your goal to gain long-term or short-term profit? In the event that you earn any profits, what will you do with them? “Some cryptocurrencies are liquid, and some aren’t,” Stillman observes. “What is your level of importance to that?”
It is possible to hold a good crypto portfolio through bear markets and bull markets without losing sleep. “Samsonoff explains that when your crypto portfolio is too large or concentrated in speculative altcoins, you risk having paper hands, a term that describes investors who sell out of fear at the first sign of a downturn.
“In contrast, if you are too small, you risk getting greedy as confirmation bias kicks in, and you may buy into a top after feeling excluded during the rally,” he says.
How to Manage Your Crypto Portfolio
The key to managing your crypto portfolio is to keep a long-term perspective, which means years and decades. “Edelman says investors should concentrate on the potential profits over decades, rather than weeks or months since this is a new, volatile asset class.
Leinweber says that portfolios that have been in profit for at least four years are generally profitable. “It’s not a get-rich-quick scheme, but an investment in a new technology.”
Experts recommend dollar-cost averaging, which involves buying or selling a fixed dollar amount regardless of market conditions. By doing this, emotion can be removed from the equation.
“If you try to time the market perfectly or check your portfolio every day in general, you will experience more stress and make bad decisions. As a result, it is better to periodically reevaluate your positions and rebalance them to reflect your evolving views of the market, just like you would with your stock portfolio,” de Sousa says.
You could increase your overall risk if your cryptocurrency allocation overwhelms your portfolio.
According to Greg King, founder, and CEO of Osprey Funds, rebalancing to your target weights should be a monthly or quarterly process if you’re not an active trader.
How To Track Your Crypto Portfolio
It can be difficult to keep track of your crypto portfolio.
Samsonoff says you should align your thesis time frame when tracking your crypto portfolio. Be aware of your triggers for entry and exit before you begin.
“Without a clear plan, your convictions-or lack thereof-will be tested and you will be compelled to make emotional decisions based on crypto market volatility,” he claims.
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