How much of my portfolio should be crypto? What's the right amount of crypto to hold? Let's see.
How much of my portfolio should be crypto?
According to a 2019 Yale research, 4% to 6% of a portfolio should be allocated to cryptocurrencies. The analysis covered all cryptocurrencies and specifically mentioned ether, XRP, and bitcoin. Financial advisors, CFPs, and other money professionals are starting to more frequently agree on a 1% to 5% asset allocation guideline for cryptocurrency. Intriguingly, Rio de Janeiro, a city in Brazil, last month invested 1% of its treasury reserves in cryptocurrencies, which will serve as a crucial case study for governments.
According to Edelman, a 1% allocation is a kind of magical sweet spot. Since it is so little, a market fall would essentially go unnoticed while yet exposing typical investors to the possibility of earning twice as much money as they otherwise would. While the amount of institutional investment in crypto seems to be making a total collapse less and less likely, consumers and advisors are understandably still holding their breath. Therefore, Edelman notes, 1% is enough of a contribution to be considered “material.”
Edelman plugged this pattern into a hypothetical scenario involving what he describes as a typical portfolio containing a 60/40 asset mix. The price of bitcoin rose by 1,500% during the historic 2017 bull run, then fell by 84%, according to historical statistics from the same period. Without bitcoin, a portfolio would earn returns of roughly 7% in a year (conservative estimate) and, with compound interest, 14.5% in two years. However, by significantly altering the asset allocation to 59/40/1 and adding 1% in cryptocurrency, the prospective profits might increase to 22% in year 1 and 15.4% in year 2 (with the 85% dip), finally resulting in a profit.
And in the rare event that crypto crashes entirely, the 59/40/1 allocation still results in a 6% return in year 1 and 13.4% in year 2, says Edelman.
“This shows that the allocation can materially improve the return but the downside risk is insignificant,” he says.
Final thoughts
I think now you know the answer to "how much of my portfolio should be crypto?"
Since cryptocurrency's youthful nature is noticeable, as investors are still pinning down a universal strategy that works. However, there is a consensus that investing in coins comes with risk, and a healthy portfolio will need to offset volatility with more stable assets.
