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A bitcoin ATM in Miami.
Bitcoin prices experienced a remarkable increase in 2024, but financial experts urge caution against rushing into investments fueled by excitement.
Cryptocurrencies, particularly Bitcoin, should ideally take up a small portion of an investor’s overall portfolio—generally not exceeding 5%—due to their high volatility, according to financial advisors. Some believe that certain investors might even be better off avoiding cryptocurrencies entirely.
“Investors should not allocate the same proportion of their portfolio to bitcoin as they would to the Nasdaq or the S&P 500,” stated Ivory Johnson, a certified financial planner and the founder of Delancey Wealth Management in Washington, D.C. He highlighted that when dealing with a volatile asset class, the required proportion in a portfolio to achieve similar impact to traditional investments like stocks and bonds should be lower.
Factors Behind Bitcoin’s Price Surge in 2024
In 2024, Bitcoin emerged as the dominant investment, appreciating by approximately 125% and closing the year around $94,000, a significant rise from about $40,000 at the start of the year. In contrast, the S&P 500 increased by 23%, while the tech-heavy Nasdaq gained 29%.
This price increase followed Donald Trump’s victory in the U.S. presidential elections, with expectations that his administration would further deregulate markets, thereby boosting demand for cryptocurrencies.
Additionally, the U.S. Securities and Exchange Commission approved exchange-traded funds (ETFs) directly investing in Bitcoin and ether, the second largest cryptocurrency, for the first time last year, paving the way for easier access for retail investors.
Nevertheless, experts warn that such high returns often come with significant risks. “High returns require concomitant high risks, and cryptocurrencies exemplify this,” noted Amy Arnott, a portfolio strategist with Morningstar Research Services.
According to Arnott, Bitcoin’s volatility has been nearly five times greater than that of U.S. stocks since 2015, with ether’s volatility being even more pronounced. She advises maintaining a portfolio weighting of 5% or lower in cryptocurrencies, indicating that many investors may wish to bypass them completely.
Moderate Allocations Recommended by BlackRock
Bitcoin has demonstrated substantial losses in the past, losing 64% of its value in 2022 and 74% in 2018. This means recovering from significant losses requires an even greater percentage of gains. While recent crypto returns have alleviated some of this risk, there is no guarantee that this trend will continue.
BlackRock, a major asset manager, acknowledges a place for Bitcoin within a diversified portfolio for those comfortable with the associated risks and who believe in its potential wider adoption. They recommend a conservative allocation of 1% to 2% in Bitcoin to mitigate its impact on overall portfolio risk. Exceeding this range could considerably heighten a portfolio’s vulnerability to sudden price drops.
To illustrate, a 2% allocation to Bitcoin can account for around 5% of the risk in a conventional balanced portfolio, but increasing it to 4% could elevate that risk exposure to 14%.
Vanguard’s Cautious Approach to Cryptocurrency
In contrast, Vanguard, another significant player in asset management, retains a skeptical stance toward cryptocurrencies, asserting they are more of a speculation than a legitimate investment. Janel Jackson, formerly Vanguard’s global head of ETF Capital Markets, highlighted the lack of historical performance, inherent economic value, and cash flow in the crypto market.
Investment Strategies and Long-Term Holding
Ultimately, the amount of cryptocurrency an individual investor should consider depends on their risk tolerance and investment goals. Younger investors or those with a higher risk appetite might allocate more of their portfolios to cryptocurrencies, while more conservative investors might confine their exposure to about 5% of their assets.
Experts recommend employing a dollar-cost-averaging strategy for purchasing cryptocurrencies, allowing investors to incrementally build positions. “I prefer to invest 1% at a time until I reach my intended risk threshold,” said Johnson. This method mitigates the risk of significant losses if market conditions shift after a large investment is made.
Moreover, experts suggest that investors should consider a long-term approach to holding cryptocurrencies, akin to traditional investments, with recommendations advocating for a holding period of at least ten years.
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