Katherine Dowling, the general counsel and chief compliance officer at Bitwise Asset Management, likens investing in cryptocurrency like bitcoin to using cayenne pepper in a portfolio – a little goes a long way. Ivory Johnson, a certified financial planner, concurs with this analogy, emphasizing the importance of considering cryptocurrencies as alternative investments due to their volatility. Johnson recommends allocating 2% to 3% of an investment portfolio to crypto, as this is typically more than enough to have a significant impact on overall performance. The decision of whether or not to invest in crypto, and how much to allocate, should be based on the investor’s risk tolerance and capacity.
Johnson explains that younger investors, such as those in their mid-20s, may have the ability to take on more risk and can afford to have a larger percentage of their portfolios in crypto, such as 5% to 7%. Conversely, older investors, like a 70-year-old, should be more conservative in their allocation to crypto to avoid major losses. Wells Fargo Advisors caution that investing in bitcoin and other cryptocurrencies is highly speculative and involves a high degree of risk, with the potential for a total loss of the investment. Investors must have the financial ability, sophistication, and willingness to bear the risks associated with crypto investments.
Cryptocurrency prices have been highly volatile, with bitcoin experiencing significant fluctuations in value. In 2022, bitcoin prices collapsed by about 64%, only to quadruple from their low point in November and soar more than 50% year-to-date in 2023. Johnson notes that bitcoin is approximately eight times as volatile as the S&P 500, making it a risky asset for many investors. The SEC’s approval of spot bitcoin exchange-traded funds in January made it easier for investors to access the crypto market, but the asset class is still not suitable for everyone.
Johnson suggests that investors may want to consider dollar-cost averaging when investing in crypto, buying small increments over time until reaching their target allocation. This strategy can help mitigate the impact of price fluctuations in the market and reduce the risks associated with timing the market. Regular rebalancing of one’s portfolio is also recommended to ensure that crypto profits or losses do not skew the overall allocation over time. Ultimately, investing in cryptocurrency requires careful consideration of one’s risk tolerance, investment goals, and financial capabilities to determine the appropriate allocation for each individual investor.
