How Much Crypto Should You Own?
Most experts agree that cryptocurrencies should make up no more than 5% of your portfolio.
This amount is “small enough to keep an investor comfortable in periods of high volatility, but also large enough to have a truly positive impact on the portfolio if crypto prices rise,” says Bruno Ramos de Sousa, head of global expansion at Hashdex.
Some experts, such as Aaron Samsonoff, chief strategy officer and co-founder of InvestDEFY, allow for allocations as high as 20%. But how much crypto should be in your portfolio ultimately depends on your risk tolerance and beliefs about crypto.
In addition to outsized long-term returns, cryptocurrencies tend to have excessive volatility.
In the case of the CFA Institute study, the larger the allocation to Bitcoin, the higher the return and the greater the volatility. Between January 2014 and September 2020, the traditional portfolio without Bitcoin yielded a 6.26% return versus the traditional portfolio with a 2.5% Bitcoin allocation, which produced an annual return of 8.6%, which also saw increased volatility.
“The potential for outsized returns coupled with the significant risks of this emerging asset class means that a very small allocation is sufficient,” says Ric Edelman, founder of Digital Assets Council of Financial Professionals and author of “The Truth About Crypto.”
Experts say that a small amount can materially improve your overall returns without leaving you at risk of financial harm if your cryptocurrency investment declines significantly or even falls to zero.
“Adding some to your portfolio can be a great way to really take advantage of long-term gains while knowing that if you don’t make it big, you aren’t out your whole investment portfolio,” says Callie Stillman, partner at Lift Financial.
What Should My Crypto Portfolio Look Like?
Once you’ve decided how much cryptocurrency to own, the question becomes which crypto assets to buy and how much to hold.
Edelman suggests four crypto portfolio options. First, you could own Bitcoin only. It’s the oldest and largest digital asset in crypto market dominance.
“When institutions invest, they typically buy only Bitcoin. It might not produce the highest gains, but it’ll be the last to go to zero,” he says.
As Bitcoin’s market dominance fades, it’s increasingly important to diversify your position to capture the complete crypto opportunity set, says Martin Leinweber, digital asset product strategist at MarketVector Indexes.
“Different assets deliver notably different return patterns and respond heterogeneously to Bitcoin pullbacks,” says Leinweber. “While short-term correlations can be high, longer-term “Bitcoin has nothing to do with a gaming token such as Axie Infinity or an exchange token such as Binance Coin (BNB).”
A popular alternative to Bitcoin is Ethereum, the second largest cryptocurrency by market cap, with 18% market dominance. “Many believe it has far greater utility for global commerce and therefore will continue to gain in prominence,” Edelman says. Many other coins and tokens also rely on the Ethereum blockchain.
You could also have a portfolio that includes a mix of Bitcoin and Ethereum. “They are the Coke and Pepsi of crypto,” Edelman says. Between them, you have more than 60% of crypto’s market share.
Edelman suggests a 50-50 split or 60-40 favoring your preferred coin. “Otherwise, you’re making a big bet,” and “bets should be avoided as this asset class is plenty risky already.”
While larger coins like Bitcoin and Ethereum may make up a larger share of your portfolio, keeping smaller proportions of other crypto assets can improve your long-term returns, Leinweber says.
How do you take profits in crypto and reinvest?
So, when should you take profits on crypto? It’s tricky to know exactly when is a good time to take profits, as it often involves solid planning and discipline. It’s a good problem to have because it means you’ve made profits. However, it can also be difficult, especially with no clear goal about what to do with the money you made.
Taking profits is tricky. You’re essentially asking: Is this profit enough or do I want more? Categorically, of course, more would always be better. But, when it comes to trading, knowing when to halt is part of being smart and avoiding losses. Furthermore, knowing how to invest crypto profits in lucrative channels also requires research and keen decision-making skills.
To know when to take profits, ask yourself the following questions:
What was my reason for buying this coin?
Unlike stocks, which represent something more concrete, a cryptocurrency’s value depends on how many people say it’s valuable. Stock investors often invest based on a company’s valuation or technical analysis. With crypto, it’s a little different because it’s much like investing in the future of a community that believes a certain cryptocurrency is indeed valuable.
Ideally, before buying a coin, one should have a more substantial reason other than just buying into the hype or thrill of it. If, for example, you bought Bitcoin because you believe it’s a good long-term investment, then maybe you can stick it out depending on market conditions.
You can take profits, for example, if the outlook for an impending bear market does not sit well with you. Maybe you’d like to invest it somewhere else and re-enter the market at a more favorable time? That’s acceptable too.
However, if you’ve realized that you purchased a fancy new coin on a whim because it had a cool name or it was popular at the time, then maybe it’s time to rethink your investment strategy. If you don’t see any real long-term future or value in it but have made a significant profit now, you can consider taking your profits and reinvesting it somewhere else.
What outcome do I want?
Everyone wants to get money out of a trade. But, then again, when thinking about taking profits, the question is “how much is enough?” In terms of outcome, are you willing to risk it all and perhaps suffer a loss because you believe you’ll regain whatever you lost tenfold?
It isn’t easy to be so sure about crypto because you generally don’t know how the coin will behave. You could sell and see the price keep going up, for example, and regret selling so soon. But, then again, it’s really hard to tell because crypto prices can generally go up or down regardless of historical data.
So, what’s a trader to do? Most of the time, the key is focusing on the percentage of profits you’ve already made. People have different preferences depending on how much risk they’re willing to take. However, most traders target at least 50% before they take profits.
That being said, you can target 100% profits too before you decide to take. You can even target higher percentages. It really depends on how much risk you’re comfortable dealing with. It can be tempting to see where your investment takes you if, for example, it reaches 100% (or even way beyond).
Know, however, that this is shaky territory and may put your investment at risk. This is alright as long as you can deal with extreme volatility. Otherwise, you should have a clear percentage in mind to signal when you’re going to take your profits off the table.
Is there a better opportunity?
Investment is about finding the right opportunities at the right time. If you find yourself something better than what you’re currently invested in, it might be a good time to take your crypto profits.
Ask yourself if you’re willing to let go of your current investment in favor of rechanneling it towards something else. But, do remember the amount of profit you lose by going for option one and letting go of option two which involves the “opportunity cost.”
It could also provide insight into another characteristic that makes a cryptocurrency risky to employ in real-world transactions: crypto’s volatility. Consider that you will be relinquishing your current crypto’s potential profits and ask yourself if you’re willing to take the risk.
This goes for investors with multiple investments as well. If you decide that you’d rather have the time and money you spent on cryptocurrency invested in another opportunity (new or current), you’ll have to weigh the pros and cons as well.
