Bitcoin ATM in Miami.
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Bitcoin prices have soared in 2024. But you might want to be careful before the euphoria leads you to make a hasty purchase.
Bitcoin and other cryptocurrencies in general should take note just a piece of an investor’s portfolio — generally no more than 5% — because of its extreme volatility, according to financial experts.
Some investors might be wise to steer clear of it altogether, they said.
“You won’t have the same distribution size in bitcoin as you would Nasdaq or S&P 500” said Ivory Johnson, certified financial planner and founder of Washington, DC-based Delancey Wealth Management
“Whenever you have a really volatile asset class, you need less in the portfolio to have the same performance” as traditional assets like stocks and bonds, CNBC’s Johnson said. Financial Advisor Council.
Why did bitcoin prices go up in 2024?
Bitcoin, the largest cryptocurrency, was the most successful investment 2024, in the long run. Prices rose about 125%, ending the year at about $94,000 after starting in the $40,000 range.
In comparison, the S&P 500, the US stock index, up 23%. The Nasdaq, a technology-rich stock index, rose 29%.
Prices jumped after the victory of Donald Trump in the US presidential elections. His administration is expected to embrace deregulatory policies that would boost crypto demand.
A cartoon image of President-elect Donald Trump holding a bitcoin token in Hong Kong, China, on December 5, 2024, to mark the cryptocurrency reaching over $100,000.
Justin Chin/Bloomberg via Getty Images
Last year, the Securities and Exchange Commission also – for the first time – approved it exchange traded funds that invest directly in bitcoin and ether, the second largest cryptocurrency, making it easy for small investors to buy crypto.
But experts warned that high profits may belie the underlying danger.
“With high returns comes high risk, and crypto is no exception,” Amy Arnott, portfolio strategist for Morningstar Research Services, wrote in June.
Bitcoin has been nearly five times more volatile than U.S. stocks since September 2015, and ether has been nearly 10 times more volatile, Arnott wrote.
“A portfolio weighting of 5% or less seems prudent and many investors may skip cryptocurrencies altogether,” she said.
1% to 2% is ‘reasonable’ for bitcoin, BlackRock says
Bitcoin lost 64% and 74% its values in 2022 and 2018 respectively.
Mathematically, investors need a 100% return to recover from a 50% loss.
So far, crypto returns have been high enough to offset the added risk — but it’s not certain the pattern will continue, Arnott said.
You won’t have the same size distribution in bitcoin as you would the Nasdaq or the S&P 500.
Ivory Johnson
CFP, founder of Delancey Wealth Management
There are several reasons for this: Crypto has become less valuable as a means of portfolio diversification as it has grown in popularity, Arnott wrote. Its popularity among speculative buyers also “makes it prone to price bubbles that will eventually burst,” she added.
BlackRock, the money manager, believes there is a case for owning bitcoin in a diversified portfolio, for investors who are comfortable with “the risk of potentially rapid price declines” and who believe it will become more widely adopted, experts at the BlackRock Investment Institute wrote at the beginning of December.
(BlackRock offers a bitcoin ETF, the iShares Bitcoin Trust, IBIT.)
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A 1% to 2% allocation to bitcoin is a “reasonable range,” BlackRock experts wrote.
An overshoot would “dramatically increase” bitcoin’s share of overall portfolio risk, they said.
For example, a 2% bitcoin allocation accounts for roughly 5% of the risk of a traditional 60/40 portfolio, BlackRock estimates. But a 4% allocation increases that figure to 14% of the portfolio’s total risk, it said.
More ‘speculation’ than investment?
By comparison, Vanguard, another asset manager, has no current plans to launch a crypto ETF or offer one on its brokerage platform, officials said.
“In Vanguard’s view, crypto is more of a speculation than an investment,” Janel Jackson, Vanguard’s former global head of ETF capital markets and broker and index relations, wrote in January 2024.
Equity investors own shares in companies that produce goods or services, and many investors receive dividends; bond investors receive regular interest; and goods are real assets that satisfy consumption needs, Jackson wrote.
“While cryptocurrency is classified as a commodity, it is an immature asset class with little history, no inherent economic value, no cash flow and can wreak havoc within a portfolio,” wrote Jackson, now managing director at the firm’s Financial Advisory Services. unit.
Dollar cost averaging and long term holding
Ultimately, one’s overall crypto allocation is a function of the investor’s appetite and risk-taking ability, according to financial advisors.
“Younger, more aggressive investors could allocate more [crypto] their portfolios,” said Douglas Boneparth, a New York-based CFP and member of CNBC’s advisory board.
Investors generally keep about 5% of their classic 80/20 or 60/40 portfolio in cryptocurrency, said Boneparth, president and founder of Bone Fide Wealth.
“I think it might be a good idea to have some exposure to bitcoin in your portfolio, but it’s not for everyone and it’s going to remain volatile,” Boneparth said. “As for other cryptocurrencies, it’s hard to tell which ones are poised to be good long-term investments. That doesn’t mean there won’t be winners.”
Investors looking to buy cryptocurrencies should consider using a dollar cost averaging strategy, said Delancey Wealth Management’s Johnson.
“I buy 1% until I hit my target risk,” Johnson said. “And that way I’m not putting in 3%, 4%, 5% all at once and then something happens where it drops.”
Investors interested in cryptocurrencies would also be wise to buy and hold them for the long term, as they would with other financial assets, Johnson said.
Morningstar suggests holding the cryptocurrency for at least 10 years, Arnott wrote.
