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Katherine Dowling has an analogy that might be useful for investors who are thinking about buying cryptocurrencies like Bitcoin and wondering what amount is appropriate.
It’s “like cayenne pepper,” said Dowling, general counsel and chief compliance officer at Bitwise Asset Management, a crypto money manager. “A little goes a long way in a portfolio,” she explained earlier this month at Financial Advisor Magazine’s annual Invest in Women conference in West Palm Beach, Florida.
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Ivory Johnson, a certified financial planner and member of CNBC’s Financial Advisor Council, said the description is apt.
“The more volatile an asset class is, the less of it is needed,” said Johnson, who founded Washington, D.C.-based Delancey Wealth Management
A 2% or 3% allocation is “more than enough”
Cryptocurrencies are digital assets, a category that should be considered an “alternative investment,” Johnson said.
Other types of alternatives may include private equity, hedge funds and venture capital. Financial advisors generally consider them separate from traditional portfolio holdings such as stocks, bonds and cash.
It is “more than enough” to invest 2% or 3% of the investment portfolio in cryptocurrencies, Johnson said.
Let’s say an asset grows 50% this year and an investor holds a 1% position. That’s like having a 5 percent position in another asset that grew 10 percent, Johnson said.
Whether investors buy cryptocurrencies – and how much they hold – depends on their tolerance and ability to take risks, Johnson said.
For example, long-term investors in their mid-twenties can afford to take on more risk because they have enough time to recoup losses. Such an individual could sustain significant financial losses and reasonably hold 5% to 7% of their portfolio in cryptocurrencies, Johnson added.
However, that allocation most likely wouldn’t be suitable for a 70-year-old investor who can’t afford to expose their nest egg to major losses, he said.
“Bitcoin and other cryptocurrencies are a highly speculative investment and involve a high degree of risk,” investment strategists at Wells Fargo Advisors wrote in a note last year. “Investors must have the financial capacity, competence/experience and willingness to bear the risks of an investment and a possible total loss of their investment.”
Crypto is “an incredibly volatile asset”
Crypto prices have been on a wild run lately.
Bitcoin, for example, rose to an all-time high in early March. At its peak, the price was over $73,000, but has since declined to less than $69,000.
By 2022, Bitcoin prices had collapsed, falling about 64% this year to below $20,000. In comparison, the S&P 500 stock index lost 19.4%.
Since then, prices have quadrupled since their low point in November 2022 (as of Wednesday). They are up more than 50% year-to-date, while the S&P 500 is up about 9%.
Bitcoin is about eight times as volatile as the S&P 500, Johnson wrote in an article in the Journal of Financial Planning in December 2022, citing data from the Digital Asset Council for Financial Professionals.
The Crypto Volatility Index was about six times higher than that CBOE volatility index As of Wednesday.
“It’s still an incredibly volatile asset,” Bitwise’s Dowling said. “It’s not for everyone.”
Investing in cryptocurrencies became easier for many investors after the Securities and Exchange Commission approved a series of spot Bitcoin exchange-traded funds in January, a first for the asset class.
Investors may consider dollar-cost averaging in cryptocurrencies, Johnson said. This means purchasing small quantities at a time until the target allocation is reached. Investors should also rebalance regularly to ensure that large crypto gains or losses do not change the target allocation over time, he said.
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2024-03-27 20:26:43
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