Investing in cryptocurrencies could do some good to your investment portfolio over the long term. However, its positive impact can depend on your timing.
Research has shown that between January 2014 and September 2020, rebalancing a 2.5% Bitcoin allocation every quarter has driven investors’ returns from a standard portfolio to almost 24%. A significant improvement from a small allocation.
Still, that is only true for those who were one step ahead. If you bought as much as crypto in December 2020, there would have been no effect through last month. Therefore, the study does not immediately mean that owning a lot of cryptocurrencies today would be a good decision.
Here’s what you need to know more about determining a reasonable crypto allocation for your portfolio.
The Ideal Crypto Asset Allocation
Holding a few cryptocurrency assets can be a good idea. Not only can you maximize the benefits of the money you made in the long run, but you can also be at ease that your portfolio is pretty safe from severe financial repercussions if your crypto investments turn out unsuccessful.
Many financial experts recommend that investors should allocate 5% to cryptocurrencies, no more, no less. With that percentage, you can have peace of mind in times of extreme market volatility. Moreover, you have the chance of making money if crypto prices go up.
Cryptocurrencies are highly volatile and can offer considerable returns over the long term. Therefore, a small allocation would be enough if you combine the crypto’s potential for a big payday with its serious risks.
Plus, a small allocation can significantly raise your total returns without exposing you to the risk of a concerning money loss should your cryptocurrency bets don’t work out or lose their entire value.
Some experts also see a 20% allocation to cryptocurrency as an option. However, by the end of the day, how much you should invest in crypto comes down to your risk tolerance and opinions about it.
Choosing Cryptocurrencies to Own
Once you have made up your mind on the allocation amount for your cryptocurrency investment, the next matter you need to focus on is determining suitable cryptos and how many you should own.
You can aim for Bitcoin as a starting point. Especially, considering it is the oldest and currently the largest cryptocurrency in market capitalization. While it can’t offer potential for the biggest returns, Bitcoin is highly unlikely to lose its entire value anytime soon.
Remember to expand your asset mix of cryptocurrencies as well. That way, you can have access to a range of crypto opportunities. Different assets have different patterns of investment returns, and they react differently to Bitcoin pullbacks.
The Ether, or Ethereum as others would call it, is another ideal investment candidate.
Coming in at number two in the largest cryptocurrencies by market cap, financial experts see much potential in the Ether in global commerce, which may help further its popularity. Other digital coins and tokens also run on the Ethereum blockchain.
You can add Bitcoin and Ether to your portfolio simultaneously. That’s because, between those two, you can have over a 60% share of the trillion-dollar crypto market.
You can invest equally in Bitcoin and Ether, or you can invest 60% on the crypto you prefer more and 40% on the other. If you choose neither a 50/50 nor a 60/40 split, you might set yourself up for a financially detrimental outcome since cryptocurrency is already a very risky asset class.
Larger cryptos such as Bitcoin and Ethereum may cover a big part of your portfolio. Still, you should also leave a small part of it to other cryptocurrencies to increase your potential returns over the long term.
Consider Crypto ETFs
In addition to buying cryptocurrencies directly, there are alternative ways you can try to participate in the crypto market. One of them is through crypto exchange-traded funds (ETFs).
If you’re a passive investor, you should stick with cryptocurrency investments such as Bitcoin, Ethereum, and crypto index funds.
Single name blockchains and ventures, including the major ones, carry significant tail risk. And compared to the three investments mentioned above, single-name blockchains and projects, big or small, may have a tough time beating them on a risk-adjusted basis.
A multi-token fund following a market cap-weighted index is a good choice. It has a high chance of providing you returns.
So, you’re indirectly betting on the well-performing assets and selling the ones performing poorly, with the asset manager taking care of the investing and following the index on your behalf.
A market cap-weighted ETF also means it invests mainly in Bitcoin and Ethereum. Thus, typically making up 90% or more of the overall portfolio. Additionally, some crypto ETFs put money into public companies focusing on the crypto business instead of purchasing cryptocurrencies directly.
A separately managed account (SMA), usually provided by investment firms, is another option you can look into.
SMAs are similar to mutual funds; only they are tailored portfolios that can hold up to two dozen cryptos. The account is managed according to your terms, with a high level of customization in how it rebalances and harvests tax loss that is not exactly possible with funds.
However, SMAs are not as financially accessible as ETFs or mutual funds. SMAs require an investment of tens of thousands of dollars, making them more targeted toward high-net-worth investors.
Crypto Portfolio Management
Focusing on the long term is the most crucial factor in managing a crypto portfolio.
Cryptocurrencies are still relatively new and highly volatile types of assets. Therefore it’s better to think about the money you could make over the years and decades rather than weeks or months.
A crypto portfolio investing for about four years or longer is usually in profit. Keep in mind that you’re investing in new technology and not trying your luck on a get-rich-quick scheme.
Financial professionals suggest that investors use dollar-cost average, so they can remain objective and avoid any kind of emotional investing.
Instead of regularly checking your portfolio and choosing what you believe is the perfect time to enter the market, it would be better to manage your crypto portfolio in a way similar to a stock portfolio.
By that, we mean reviewing your positions periodically and rebalancing based on your growing perspective on the market. Otherwise, your cryptocurrency mix may take up too much space in your portfolio, causing your overall risk to increase further.
Moreover, if you’re not an active investor, you should have a stable percentage allocation to cryptocurrencies and readjust your portfolio to your preferred allocation every month or quarter.