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A bitcoin ATM in Miami.
Joe Raedle | Getty Images News | fake images
bitcoin prices skyrocket in 2024. But you may want to exercise caution before the euphoria sends you on a hasty buying spree.
According to financial experts, Bitcoin and other cryptocurrencies should generally represent only a small portion of investors’ portfolios (generally no more than 5%) due to their extreme volatility.
Some investors would do well to stay away altogether, they said.
“You’re not going to have the same amount of allocation in bitcoins that you would have Nasdaq or the S&P 500“said Ivory Johnson, certified financial planner and founder of Delancey Wealth Management, based in Washington, D.C.
“Anytime you have a really volatile asset class, you need less in the portfolio to have the same impact” as traditional assets like stocks and bonds, said Johnson, a member of CNBC’s Financial Advisory Board.
Why bitcoin prices rose in 2024
Bitcoin, the largest cryptocurrency, was the highest-performing investment of 2024, by far. Prices rose about 125%, ending the year around $94,000 after starting in the $40,000 range.
In comparison, the S&P 500, a US stock index, rose 23%. The Nasdaq, a tech-heavy stock index, rose 29%.
Prices rose after Donald Trump’s victory in the US presidential election. His administration is expected to adopt deregulatory policies that would stimulate demand for cryptocurrencies.
A caricature of President-elect Donald Trump holding a bitcoin token in Hong Kong, China, on December 5, 2024, to mark the cryptocurrency reaching more than $100,000.
Justin Chin/Bloomberg via Getty Images
Last year, the Securities and Exchange Commission also approved, for the first time, exchange-traded funds that invest directly in bitcoin and ether, the second-largest cryptocurrency, making it easier for retail investors to purchase cryptocurrencies.
But experts warned that the high profits may mask an underlying danger.
“With high returns come high risk, and cryptocurrencies are no exception,” said Amy Arnott, portfolio strategist at Morningstar Research Services. wrote in June.
Bitcoin has been almost five times more volatile than US stocks since September 2015, and ether has been almost 10 times more volatile, Arnott wrote.
“A portfolio weight of 5% or less seems prudent, and many investors may want to skip cryptocurrencies altogether,” he said.
Between 1% and 2% is “reasonable” for bitcoin, says BlackRock
bitcoin lost 64% and 74% of its value in 2022 and 2018, respectively.
Mathematically, investors need a 100% return to recover from a 50% loss.
So far, cryptocurrency returns have been high enough to offset their added risk, but it’s not a given that that pattern will continue, Arnott said.
You’re not going to have the same size allocation in bitcoin as you would in the Nasdaq or the S&P 500.
Ivory Johnson
CFP, founder of Delancey Wealth Management
There are a few reasons for this: Cryptocurrencies have become less valuable as a portfolio diversifier as they become more common, Arnott wrote. Its popularity among speculative buyers also “makes it prone to price bubbles that will eventually burst,” he added.
BlackRock, a money manager, believes there is a case for holding bitcoin in a diversified portfolio, for investors who are comfortable with the “risk of potentially rapid price declines” and who believe it will be more widely adopted, experts at BlackRock Investment Institute . wrote at the beginning of December.
(BlackRock offers a bitcoin ETF, iShares Bitcoin Trust, IBIT).
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A 1% to 2% allocation to bitcoin is a “reasonable range,” BlackRock experts wrote.
Going further would “dramatically increase” bitcoin’s share of a portfolio’s total risk, they said.
For example, a 2% bitcoin allocation represents about 5% of the risk of a traditional 60/40 portfolio, BlackRock estimated. But a 4% allocation increases that figure to 14% of the portfolio’s total risk, he said.
More ‘speculation’ than investment?
By comparison, Vanguard, another asset manager, currently has no plans to launch a crypto ETF or offer one on its brokerage platform, officials said.
“In Vanguard’s view, cryptocurrencies are more of a speculation than an investment,” said Janel Jackson, former global head of ETF Capital Markets and Broker & Index Relations at Vanguard. wrote in January 2024.
Stock investors own shares of companies that produce goods or services, and many investors earn dividends; bond investors receive periodic interest payments; and raw materials are real assets that satisfy consumer needs, Jackson wrote.
“While cryptocurrencies have been classified as a commodity, it is an immature asset class that has little history, no inherent economic value, no cash flow, and can wreak havoc within a portfolio,” wrote Jackson, now a Services executive. of Financial Advisory of the company. unit.
Dollar Cost Averaging and Long-Term Maintenance
Ultimately, one’s total cryptocurrency allocation is a function of an investor’s appetite and ability to take risk, according to financial advisors.
“Younger, more aggressive investors could allocate more (cryptocurrencies) to their portfolios,” said Douglas Boneparth, a New York-based CFP and member of the CNBC Advisory Board.
Investors typically keep about 5% of their classic 80/20 or 60/40 portfolio in cryptocurrencies, 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 will still be volatile,” Boneparth said. “When it comes to other cryptocurrencies, it’s difficult to determine which ones are poised to be a good long-term investment. That’s not to say there won’t be winners.”
Investors looking to buy cryptocurrencies should consider using a dollar-cost averaging strategy, said Johnson of Delancey Wealth Management.
“I buy 1% at a time until I reach my target risk,” Johnson said. “And that way I won’t put in 3%, 4%, 5% at a time and then something happens that drops precipitously.”
It would also be prudent for investors interested in cryptocurrencies to buy and hold them for the long term, as they would other financial assets, Johnson said.
Morningstar suggests holding cryptocurrencies for at least 10 years, Arnott wrote.
