How much digital currency should go into an investor’s portfolio?
It depends on many variables, including one’s tolerance for risk and their familiarity with cryptocurrencies.
An investor could put a small fraction of his portfolio into these digital assets.
Alternatively, he could commit a far larger amount, setting himself up for greater upside potential, but also more downside risk.
[Ed. note: Investing in cryptocoins or tokens is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.]
This article, while not meant to provide anyone with financial advice, features a sample portfolio of a young person (aged 18-35) saving for retirement.
This scenario seems likely, as a recent Harris Poll (conducted on behalf of Blockchain Capital) found that respondents aged 18-34 were not only the age group most likely to be “somewhat familiar” with bitcoin, but also the most likely to invest in this digital currency.
Since a person in these circumstances would have a long investment horizon, he would likely have significant tolerance for risk.
This piece incorporates input from analysts on how much of this sample portfolio should go into cryptocurrencies.
Don’t Invest What You Can’t Afford To Lose
Before a person even thinks about investing in cryptocurrencies, there are some basic principles they should follow.
For starters, “never put more into crypto than you can afford to lose,” emphasized Jacob Eliosoff, a cryptocurrency fund manager.
“This is still all very risky,” he stressed.
“If you can’t laugh wryly and move on if it goes to $0, you should never have gotten in.”
Eliosoff’s point is crucial, as some investors poured significant amounts of their savings into digital currencies during the market boom, only to see the value of these assets plunge when the bubble burst, according to The New York Times.
Some enthusiasts even used student loan money to invest in cryptocurrencies, according to a study reported on by Fortune.
While these examples may seem extreme, they shouldn’t frighten everyday investors from benefiting from these innovative assets.
“You’re a fool if you don’t invest in crypto assets,” said Tim Enneking, managing director of Digital Capital Management.
At the same time, he emphasized caution, stating that “you’re also a fool if you invest too much.”
Digital Assets An ‘Excellent Tool,’ Says Analyst
“Cryptoassets provide an excellent tool for portfolio management due to their asymmetric risk,” Mati Greenspan, senior market analyst for social trading platform eToro, wrote in a recent newsletter.
In other words, if an investor puts a small fraction of his portfolio into digital currencies, he could end up losing everything he invested. However, the returns could be end up being astronomical.
“Everyone should have 1-2% of their portfolio in crypto assets,” said Enneking, adding that “enthusiasts can have up to 5-10%.”
“Anything more than that should be reserved for true experts and devotees.”
Small Allocations To Crypto
Several other analysts suggested that investors make only small allocations to digital currencies, putting no more than 10% of their portfolio into these innovative assets.
“A 3-5% allocation of crypto is appropriate” for a “young professional” in the aforementioned age range, said David Martin, chief investment officer at U.S. asset manager Blockforce Capital.
Digital assets are “uncorrelated to any other asset class” he noted, “so they do well to boost diversification in our highly correlated and ever-increasing global markets.”
Joe DiPasquale, CEO of cryptocurrency fund of hedge funds BitBull Capital, mentioned similar figures.
“I would say anywhere between 0% - 5% of the portfolio being in crypto is a good start” for a young person saving over the long-term.
He added that “if possible,” the portfolio “should be balanced every year, depending on how the market matures.”
Marouane Garcon, managing director of crypto-to-crypto derivatives platform Amulet, also weighed in, stating that:
“Given the volatility and uncertainty of crypto I would still make it a small part of my overall portfolio,” adding that “anywhere around 5-10%” of one’s entire portfolio is reasonable.
Some market observers suggested making more sizable allocations to digital assets.
Greenspan provided slightly more aggressive figures than some of the other analysts who contributed to this article.
“Depending on the size and makeup of the portfolio as well as the tolerance for risk,” an investor could put “between 6 and 18%” into cryptocurrencies.
Scott Weatherill, chief risk manager of B2C2 Japan, said that “I think 20% is very reasonable, however I would also add that it’s best just to buy BTC and ONLY BTC.”
It “hugely simplifies all of the tax headaches of going in and out of altcoins (given the current legal landscape) and is likely to outperform the broader space given favourable scarcity dynamics (low inflation compared with broader space… which will be emphasized at the next halving).”
Expertise’s Key Role
More than one analyst emphasized that an investor might allocate a substantial portion of their portfolio to digital currencies, as long as they have the right expertise.
Eliosoff said that “people who are following closely enough” to know the difference between bitcoin and bitcoin cash, for example, might put "up to 33% of their portfolio into cryptocurrencies.
Marius Rupsys, a digital currency trader, also offered some scenarios under which investors could make notable allocations to crypto assets.
“For people age 30 or 35 who have professional background in investment management maximum exposure to crypto should be 30% if they are in crypto full time,” he stated.
It “can go up in % if they are in crypto more than 2-3 years (for example, I am trading crypto 6 years, if I start underperforming compared to the market, will reduce my exposure to 20%).”
Disclaimer: I am not a financial advisor, and nothing I present in this article constitutes financial advice.
Disclosure: I own some bitcoin, bitcoin cash and ether.