Bitcoin skyrocketed in 2024. If so, how much should you own?

Bitcoin In 2024, prices skyrocketed. But before you get carried away and rush to buy, you might want to tread carefully.

Financial experts say Bitcoin and other cryptocurrencies are so volatile that they typically make up only a small portion of an investor’s portfolio, typically less than 5%.

Some investors may be wise to stay away entirely, they say.

“You won’t be able to have the same size allocation as Bitcoin. Nasdaq or S&P500” said Ivory Johnson, a certified financial planner and founder of Washington, D.C.-based Delancey Wealth Management.

“Anytime you have an asset class that is really volatile, you should include it in your portfolio to have the same impact as traditional assets like stocks and bonds,” said Johnson, a member of the CNBC Financial Advisors Council. “There are fewer asset classes to invest in.”

Bitcoin, the largest cryptocurrency, was the best performing investment in 2024 by a wide margin. Prices rose about 125%, starting the year in the $40,000 range and ending the year at around $94,000.

By comparison, the US stock index S&P 500 rose 23%. The tech-heavy Nasdaq index rose 29%.

Prices skyrocketed following Donald Trump’s victory in the US presidential election. The administration is expected to adopt deregulatory policies to stimulate demand for cryptocurrencies.

Last year, the Securities and Exchange Commission also approved the first exchange-traded fund to invest directly in Bitcoin and the second-largest cryptocurrency, Ether, making it easier for individual investors to buy cryptocurrencies.

But experts warned that behind the high profits there could be potential dangers.

“With high returns comes high risk, and cryptocurrencies are no exception,” Morningstar Research Services portfolio strategist Amy Arnott wrote in June.

Since September 2015, Bitcoin has been nearly five times more volatile than U.S. stocks, and Ether has been nearly 10 times more volatile, Arnott wrote.

“It seems prudent to keep the portfolio weight below 5%, and many investors may want to avoid cryptocurrencies altogether,” she said.

Bitcoin lost 64% and 74% of its value in 2022 and 2018, respectively.

Mathematically, an investor needs a 100% return to recover from a 50% loss.

So far, crypto returns have been high enough to offset the added risk, but Arnott said there’s no guarantee this pattern will continue.

There are several reasons for this. As cryptocurrencies have become more mainstream, their value as a means of portfolio diversification has diminished, Arnott writes. And because of its popularity among speculative buyers, it is “prone to a price bubble that will eventually burst,” he added.

Asset management firm BlackRock says owning Bitcoin in a diversified portfolio is a good option for investors who can tolerate “the risk of a potentially rapid price decline” and believe Bitcoin will become more widely adopted. We believe it is effective, write experts at BlackRock Investment Institute. In early December.

(BlackRock offers Bitcoin ETF, iShares Bitcoin Trust, and IBIT.)

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BlackRock experts say a 1% to 2% allocation to Bitcoin is a “reasonable range.”

Beyond this, Bitcoin’s share of total portfolio risk will “exponentially increase”, they said.

For example, BlackRock estimated that a 2% Bitcoin allocation accounts for about 5% of the risk in a traditional 60/40 portfolio. But at a 4% allocation, that number increases to 14% of the total portfolio risk.

In contrast, another asset management company, Vanguard, currently has no plans to launch a crypto ETF or offer it on its securities trading platform, the people said.

“In Vanguard’s view, cryptocurrencies are more speculative than investments,” Janelle Jackson, Vanguard’s former global head of ETF Capital Markets and Broker & Index Relations, wrote in January 2024.

Stock investors own shares in companies that produce goods and services, and many receive dividends. Bond investors receive periodic interest payments. And goods, Jackson wrote, are real assets that satisfy consumption needs.

“While cryptocurrencies are classified as a commodity, they are currently an immature asset class with little history, no inherent economic value or cash flows, and the potential to wreak havoc within a portfolio.” wrote Mr. Jackson, an executive in the company’s financial advisory services. unit.

Ultimately, the total crypto allocation will depend on an investor’s appetite and ability for risk, according to financial advisors.

“Younger and more aggressive investors may allocate more funds [crypto] said Douglas Bonepers, a New York-based CFP and member of CNBC’s Board of Advisors.

Investors typically hold about 5% of their classic 80/20 or 60/40 portfolios in crypto, said Born Fied Wealth President and Founder Born Perth.

“I think it’s a good idea to have some exposure to Bitcoin in your portfolio, but it won’t be suitable for everyone and will remain volatile,” Vonepers said. “As far as other cryptocurrencies are concerned, it is difficult to pinpoint which ones are suitable for long-term investment. That is not to say there are no winners.”

Delancey Wealth Management’s Johnson said investors looking to invest in cryptocurrencies should consider adopting a dollar-cost averaging strategy.

“You buy 1% at a time until you reach your target risk,” Johnson said. “That way you don’t have something like putting in 3%, 4%, 5% all at once and then it suddenly drops off.”

Johnson said it is also wise for investors interested in cryptocurrencies to buy them and hold them for the long term, just like any other financial asset.

Morningstar suggests holding cryptocurrencies for at least 10 years, Arnott wrote.