While there is still a lot of room for debate about the long-term value of cryptocurrencies, many financial advisers are now suggesting including a small amount in your investment portfolio. Crypto remains a highly speculative investment, but it is commonly used as a hedge against inflation and to diversify investments away from stocks. But what is the law crypto allocation in your wallet? The commonly recommended range seems to be between 1% and 5% of your total investments, provided you are still comfortable if you lose everything.
The Case for Investing 1-5% of Your Portfolio in Crypto
Cryptocurrency, if you don’t know it somehow, is a secure digital currency on a decentralized computer network, enabling peer-to-peer transactions without government interference. The long-term bet on cryptocurrency is that this is the future of finance and that it will eventually supplant traditional fiat money. Since these cryptocurrencies have a limited or closed supply, in theory anyone who bets correctly on the crypto could see very high returns on their initial investment (for example, the 10,000 Bitcoins notoriously spent on two Papa Johns pizzas. in 2010 would be worth $ 571,671,000 today).
Similar to gold, crypto is also seen as a hedge against inflation and as a way to diversify a portfolio away from stocks. As Barron’s points out, from 2015 to 2020, Bitcoin’s performance was almost entirely uncorrelated to US and international stocks, high yield bonds, real estate, or gold. For this reason, financial advisers generally recommend an allocation of 1-5% of crypto in your overall investment portfolio, provided you can afford to lose everything, as this is an extremely volatile investment.
âI consider it a valid asset class in a portfolio due to its lack of correlation with traditional investments in stocks and bonds,â says Michael Kelly, CFA at Switchback Financial, in an interview for NextAdvisor. âAlthough this is high volatility, the lack of correlation [to stocks] reduces the overall volatility of the portfolio and offers the possibility of having a significant increase in returns. Having just a small allocation in a portfolio can have huge return potential with minimal downside risk. “
The case for 0% crypto in your wallet
While JPMorgan Chase is willing to sell cryptocurrency products, its CEO Jamie Dimon believes that Bitcoin, the most popular cryptocurrency, is “worthless”.
“It doesn’t matter what anyone in the room thinks about it, or what any libertarian thinks about it, or what anyone thinks about it, the government is going to regulate it. They will regulate it for [anti-money laundering] purposes, for [Bank Secrecy Act] for tax purposes, âDimon said, alluding to the uncertainty associated with renewed interest in regulation under the Biden administration.
Other than that, cryptocurrency being a reliable ‘store of value’ that will replace fiat money is hardly guaranteed. Like Eswar Prasad, professor of trade policy at Cornell University, explains to the Wall Street Journal: âBitcoin depends on the faith of investors and nothing more. It might as well go back to zero tomorrow if 10% of investors sell.
It also remains to be seen which cryptocurrencies will be the ‘winners’ in the years to come (many people who invest in cryptocurrency only hold onto it until it becomes more widely accepted). And while scarcity is a selling point for any given cryptocurrency, there doesn’t seem to be any scarcity in the number of cryptocurrencies you can bet on. Assuming the average investor has little knowledge of how these currencies work, how can they predict which currencies will thrive and be more widely accepted?
At the end of the line
As with any investment, your decision to invest in crypto should be based on your tolerance for risk, as discussed with an investment advisor. Crypto presents a risk to your portfolio, but its volatility can also work in your favor in the short term, especially for diversification purposes. If you choose to invest in crypto, whether with a buy and hold strategy or for short-term trades based on price fluctuations, do your research and develop a solid understanding of Why it can doThe meaning of investing in crypto in the first place.