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Katherine Dowling has an analogy that might be useful for investors considering buying a cryptocurrency like Bitcoin and wondering what the right amount is.
Dowling, general counsel and chief compliance officer at cryptocurrency fund manager Bitwise Asset Management, said it’s “like chili peppers.” “A little goes a long way” in a portfolio, she explained earlier this month at Financial Advisor Magazine’s annual Women in Investing conference in West Palm Beach, Florida.
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That description is apt, says Ivory Johnson, a certified financial planner and a member of CNBC’s Financial Advisory Board.
“The more volatile an asset class is, the less you need,” said Johnson, founder of Washington, D.C.-based Delancey Wealth Management.
A 2% or 3% allocation is “more than enough”
Johnson said cryptocurrencies are digital assets and should be considered “alternative investments.”
Johnson said allocating 2% or 3% of a portfolio to cryptocurrencies is “more than enough.”
Suppose an asset has grown 50% this year and an investor holds a 1% position. Johnson said it’s like having a 5% position in another asset that has grown 10%.
Johnson said whether investors buy cryptocurrencies — and how much to hold — will depend on their risk tolerance and capabilities.
For example, long-term investors in their 20s can take greater risks because they have enough time to recoup losses. Johnson added that such a person might be able to withstand large financial losses and might reasonably hold 5% to 7% of their portfolio in cryptocurrencies.
However, he said this allocation was likely not suitable for investors in their 70s as they could not afford significant losses on their savings.
“Bitcoin and other cryptocurrencies are highly speculative investments that involve a high degree of risk,” investment strategists at Wells Fargo Advisors wrote in a note. notes last year. “Investors must have the financial capability, sophistication/experience and willingness to assume investment risk and the potential for total loss of investment.”
Cryptocurrency is ‘an extremely volatile asset’
Cryptocurrency prices have been on a wild rise lately.
BitcoinFor example, it surged to an all-time high in early March. Its highest price once exceeded $73,000, but has since fallen back to less than $69,000.
Entering 2022, the price of Bitcoin plummeted, falling approximately 64% that year to below $20,000. In comparison, the S&P 500 stock index fell 19.4%.
As of Wednesday evening, prices had quadrupled from their November 2022 lows. They have soared more than 50% so far this year, while the S&P 500 has gained about 9%.
Citing data from the Digital Asset Council of Financial Professionals, Johnson wrote in a December 2022 Financial Planning Journal article that Bitcoin is about eight times more volatile than the S&P 500 Index.
this Cryptocurrency Volatility Index About six times the original CBOE Volatility Index As of Wednesday.
“It’s still an extremely volatile asset,” said Bitwise’s Dowling. “It’s not for everyone.”
Investing in cryptocurrencies has become easier for many investors since the U.S. Securities and Exchange Commission approved a series of spot Bitcoin exchange-traded funds in January, a first for the asset class.
Johnson said investors may want to consider dollar-cost averaging when investing in cryptocurrencies. This requires buying a little at a time until the target allocation is reached. He said investors should also rebalance regularly to ensure that large cryptocurrency profits or losses don’t shift target allocations over time.
