For the past few years, cryptocurrency investing has grown in popularity. Pretty much everyone knows about Bitcoin, Ethereum, and the powers of blockchain technology these days. And for many, crypto is the most exciting alternative asset class out there.
But how can you decide if your asset allocation should include crypto? And if you decide to invest, how do you balance your new digital assets with the rest of your portfolio?
Let’s look at the pros and cons of adding crypto assets to your portfolio and including them in your investing strategy.
Crypto As An Alternative Asset Class
Digital assets, including cryptocurrencies and non-fungible tokens (NFTs), are increasingly accepted as asset classes by many investors and financial professionals. And if you ask your friend group, there's a good chance you know someone currently investing in crypto.
This newfound popularity makes sense when you consider how quickly crypto has grown recently and the fact that major tokens even correlate to the stock market nowadays.
Currently, the global cryptocurrency market cap is about $2 trillion, and the global NFT market cap is nearing $50 billion. While these market caps pale compared to the total value of stocks or the global real estate market, these are still fairly substantial numbers.
Due to the increase in crypto's market cap, some have started considering crypto as an alternative asset class. Rather than being considered part of the “traditional” asset allocation of stocks and bonds, there’s a case for crypto assets to be included with alternative investments like precious metals and other commodities.
Alternative assets can be attractive for an investment portfolio because they add the potential for growth to the portfolio — beyond what you might expect with stocks and bonds.
And by adding alternative assets, especially if much of your portfolio focuses on index products, it’s possible to provide a little extra oomph to your portfolio. Cryptocurrencies offer that potential, especially when rapid price increases that have happened in the past for various cryptos are taken into account.
Pros & Cons Of Including Crypto In Your Portfolio
Before you decide to include crypto in your asset allocation, it’s important to understand the advantages and disadvantages involved.
Mainstream media might be full of stories of Bitcoin millionaires and successful crypto investors. But while it might seem like a no-brainer to add crypto to your portfolio, it’s important to be prepared for some of the risks.
Some advantage of investing in cryptocurrencies for some of your portfolio include:
Despite diversifying your portfolio and having a high growth potential, investing in crypto isn't without downsides:
How To Add Crypto To Your Asset Allocation
If you decide that you want to add crypto to your asset allocation and use it as part of your portfolio strategy, here are some things to consider as you proceed.
Do You Already Have Traditional Assets?
Because crypto represents a new asset class, it might make sense to hold off on adding it to your portfolio until you’ve already established a portfolio with traditional assets.
For example, some professionals suggest that you start with stock and bond index funds before adding crypto to your asset allocation.
If you’re using dollar-cost averaging to build a long-term portfolio, consider making sure you allocate monthly amounts to traditional assets first. When that goal is fulfilled, you can consider introducing crypto assets to your allocation if you have leftover capital.
Will Adding Crypto Help You Reach Your Goals?
What are your long-term investment goals? Do you have an investing strategy in place? If so, how does crypto help you reach your goals?
After all, if crypto isn’t specifically helping you meet a goal, what purpose does it serve?
For example, my retirement portfolio is made up of stock and bond index products, along with some real estate investment trusts (REITs). This portion of my asset allocation is designed to help me build wealth over time in a way that is reasonably reliable. I'm also confident in this strategy since the stock market has yet to see a net loss in any 20-year period.
However, I include room for experiments and growth potential in my asset allocation. This includes various crypto assets.
The purpose of crypto in my portfolio is to ensure that I don’t miss out on potential growth because I neglected to include a new asset class. I don’t want to put too much of my portfolio in crypto because it’s still a speculative investment, but I also don’t want to completely miss the boat.
Do You Know How To Invest In Crypto?
It's easy to think of crypto investing as being very easy; just buy a few tokens, hold onto them, and ride their prices to the moon.
But crypto investing takes a lot of due diligence. For starters, you have to research the right cryptocurrency exchange to trade with. Popular options include the likes of Coinbase and Gemini, but there are dozens of other choices, each with various fees and available cryptos.
And that's just the trading side of the equation. It's vital that crypto investors protect their private keys and understand how cryptocurrency wallets work to protect their assets.
This is where your options open up. You have software wallets like MetaMask and Trust Wallet. There are also hardware wallets like Ledger and Trezor. You can also hold your crypto live on the exchange you're using, but if it gets hacked or you lose account access, you're probably out of luck.
All of this is just scratching the surface, and it can be overwhelming for beginners.
If you're brand new to investing in digital assets, you can read our cryptocurrency investing guide to learn what your options are. From there, you can use reputable exchanges like Coinbase or Gemini to add crypto to your portfolio.
Do You Have Portfolio Protection Plan?
As you add different assets to your investment portfolio, it’s important to consider how you’ll protect your wealth.
While you can’t completely avoid losses, and there are times it makes sense to take losses, it’s important to have a plan to limit losses when you can.
Some ideas for protecting your portfolio include:
- Consider Taking Profits: If a token you hold is rapidly increasing in price, consider taking profits once you double your money. I did this in my Dogecoin experiment. I still have some DOGE, just in case it ends up rising in price again. However, if it never recovers, I already made my money back — and then some.
- Try Crypto Savings Accounts: Companies like BlockFi and Celsius let you deposit popular cryptos and pay you interest for doing so. You can use these accounts to generate yield and slowly convert some of that yield into fiat that you withdraw. This lets you hold crypto in your portfolio while also earning cash for your efforts.
- Set A Stop Loss: Just as you would with some stocks, consider setting a level at which you sell your crypto to limit your losses. This can be tricky, however, because price volatility might lead to you selling to limit your losses, only to see the crypto move higher almost immediately.
- Rebalance Your Portfolio: Some experts suggest limiting your alternative investments to about 10% of your portfolio. Figure out what you’re comfortable with and then rebalance from there. For example, I like to keep my crypto assets to about 8% of my portfolio. Each quarter, I evaluate my asset allocation. If the value of my crypto exceeds that percentage, I rebalance by selling some high-performing crypto and buying other assets that are lower-priced.
As you can see, adding cryptocurrency to your portfolio isn't always as simple as just buying and holding coins and making enormous returns. Just like stocks and other assets, you need a strategy in mind if you're going to invest in digital assets.
Only Invest What You Can Afford To Lose
When adding crypto to your asset allocation, it’s important to only invest what you can afford to lose.
If crypto crashed tomorrow and never recovered, would your finances be salvageable? Avoid putting so much into crypto assets that you would be financially devastated if blockchain technology doesn’t pan out as you expect.
The Bottom Line
Including crypto in your asset allocation can be a smart way to take advantage of a potentially lucrative asset class.
However, it’s important to understand that crypto is a new asset class. It’s still speculative and you could potentially lose money. It’s true that any investment comes with a degree of risk, but crypto is considered riskier than more established assets that have a longer track record.
If you want to satisfy your crypto itch, you can always invest a bit of money by using exchanges like Coinbase since it has a $2 investing minimum. And, as mentioned, crypto savings accounts like BlockFi and Celsius let you earn passive income, which is an exciting way to diversify your income.
Just do your due diligence and explore your options carefully before investing. Adding crypto to your portfolio can make sense and yield great returns. But there's a right way, and wrong way, to start investing in crypto.
Miranda Marquit, MBA, has been covering personal finance, investing and business topics for more than 15 years, and covering crypto topics for more than 10 years. She has contributed to numerous outlets, including NPR, Marketwatch, U.S. News & World Report and HuffPost. She is an avid podcaster, co-hosting the podcast at Money Talks News. Miranda lives in Idaho, where she enjoys spending time with her son playing board games, travel and the outdoors.