How much water to drink?
How much sleep to get?
Or, how much crypto to invest in?
Well, there isn’t one right answer to any of the above questions! The answer depends on YOU.
Financial advisors haven’t always been welcoming of crypto investments. And we wouldn’t blame them one bit. Lack of regulations, untested market conditions, and volatility did propagate the ‘Do not touch crypto with a 10-foot pole’ stance. Yet, ambitious investors kept weathering the indifference, only to keep adding crypto to their investment portfolio— as per the market conditions and their risk appetite.
And that brings us to the short answer! The amount of crypto you should have in the investment portfolio is the amount you wouldn’t mind losing. As once you aren’t afraid of losing, winning comes naturally.
Understanding the Cryptocurrency Portfolio
The curious case of ‘Crypto Portfolio Allocation’ is solvable. It just requires research, investigating abilities, and planning. In other words, RIP— not literally.
Jokes apart, the question of ‘How much crypto should I have in my portfolio’ beckons an important discussion that requires a good idea of the goals, investing experience, affinity towards risk, and other factors.
According to a survey report, almost 40% of crypto buyers have close to 11% of their portfolio allocated to these high beta assets.
So, it’s 11% then! End of the story.
Not exactly; the 11% crypto portfolio talks were backed by some other numbers, including:
- 12% of the respondents want to get crypto for retirement;
- 22% of the surveyed individuals wanted to invest in crypto to diversify further.
Principles for adding crypto to your portfolio
The above insights show that there is more to crypto than just numbers. Here are a few factors to consider to better partition the portfolio. And these factors determine the principles you might want to follow while investing:
- Nature of Investment
- Risk Appetite
- Need for Diversification
- Use-cases you plan on Exploring
- Market conditions at the entry
Throughout the subsequent sections, expect us to explore every factor and the corresponding crypto investment action.
Cryptocurrency in Your Overall Portfolio
First, never trust a source that randomly gives out numbers. Before choosing crypto as an asset class, it is important to consider the above-mentioned factors. And that’s not it; contrary to what most advisors would lead you to believe, market volatility is one of the major aspects that would help you answer the question of the hour, ‘How Much Crypto should I have in my Portfolio.’
Additionally, here are some of the factors that eventually help you decide the amount of crypto that should be in your portfolio:
Nature of investment or timeframe
Are you planning to invest for a year or two? Or, are you looking to HODL, i.e., go long for 5 to 10 years easily. The answer to the questions above is more important than you think.
If you are a short-term investor, capping your crypto investments at 1% is a good start. Crypto is a volatile investing class, and short-term peaks and troughs are common. Therefore, if you are just into investing and booking profits, if and when available, allocating 1% to even 2% of your entire portfolio towards crypto makes sense.
As a HODLer, you can be braver as you will surely get to look at multiple bull and bear cycles. The exposure in the case of HODLing seems to be on the lower side (remember BTC HODLers from 2015), which allows you to go as high as 5% when it comes to partitioning the portfolio for crypto.
If you are an institutional investor, 1% is definitely the sweet spot. Remember January, when Rio De Janeiro— a popular Brazilian city— invested 1% of the entire treasury in Crypto.
Have you ever previously invested in high beta (volatile financial instruments) assets like equities and crypto? If not, no more than 1% of your portfolio should go towards crypto. As a new investor with no prior experience with volatility, anything higher than 1% might start giving you sleepless nights.
The thing with 1% is that it won’t impact your portfolio majorly even if it dries up overnight due to inclement market conditions.
On the other hand, experienced investors can go as high as 5%. They are better equipped to handle volatility and even the risk that comes with crypto investments.
What’s your investing mojo? Are you in it for quick gains or interested in something sustained and low-risk?
Before planning your crypto investment, you might want to consider answering these questions. If you are more of a debt fund person (bonds and treasuries), a 1% portfolio allocation to crypto seems legit. People with medium-risk appetites can go for anything between 2% to 5%. A high-risk appetite leads to aggressiveness and should be capped at 10% of the portfolio when it comes to crypto investing.
There can be multiple combinations as high-risk short-term investing might attract close to 5%, whereas HODLers with a high-risk appetite can consider hitting the 10% mark, as they can sustain the dry spells longer.
Need for diversification
Your portfolio players should keep your immediate, short-term, mid-term, long-term, and retirement needs in mind. If you want to create a balanced corpus— comprising debt funds, equities, ETFs, insurance plans, ELSS products, ULIPs, and more, there should be someplace for crypto.
Highly diverse portfolios with the perfect balance between low and high beta instruments should give 2% of the total value to crypto. This way, there will be more secure assets to balance the risks at every turn.
Use-cases you plan on exploring.
As a BUIDLer planning to get into crypto to build apps, resources, and products, a 1% investment in crypto seems like a good starting point. If the material gains aren’t what you seek, allocating 1% of your entire portfolio to the use-case-specific crypto or cryptos of choice makes sense.
Market conditions at the entry
Most articles and even influencers fail to consider this metric. Entering the crypto investing space during the bull market might seem all right but should not take 1% of your portfolio value along. Buying at a high price showcases optimism, but being safe matters in the long run.
However, if you can read charts well and plan on entering the market as it forms a bottom, a 2% to 5% allotment seems standard.
The factors mentioned above take every investing pattern and requirement into consideration. Yet, it doesn’t represent the entire picture. There is more!
Why is Crypto Portfolio Allocation Important?
Yes, you might start as low as 1%. Or, a 0.5% mark might also make sense, provided you aren’t a risk-taker. Ultimately, it comes down to the desired portfolio allocation, depending on your ROI (Return on Investment) goal.
Ric Edelman, Founder (Digital Assets Council of Financial Professions), considers 1% of your portfolio a fit measure for crypto investing.
On the contrary, a Yale Study report released in 2019 suggests that every investment portfolio should have at least 6% of crypto (4% to 6%), preferably Bitcoin.
Different individuals. Different mindsets. Different percentages! As incongruous as this might look, there is a logic behind it, validated by the followed pointers:
- Varied financial considerations
- The sample size of the survey (high-risk, medium-risk, or low-risk)
- Personal bias
- Market conditions at the time of the survey
- Nature of crypto (Bitcoin is considered the most reliable due to market dominance)
Therefore, it is natural to see different analysts suggesting different portfolio allocation percentages to crypto. However, if you want to get ahead and take your decisions better, here are the things to follow:
- Do-Your-Own-Research (DYOR)
- Do not fall into FOMO
- Look beyond the FUD (Fear-Uncertainty-Doubt)
- Try and learn the charts better
- Understand the crypto project fundamentals better
- Follow Dollar-Cost-Averaging if you want to invest periodically
Once you follow the strategies mentioned above, you are expected to make better calls regarding ascertaining the amount of crypto inside your portfolio.
Understand Portfolio Performance
By now, you must have made up your mind regarding the amount of crypto you want to have in your portfolio. But that isn’t where the buck stops. You should keep tracking the portfolio performance, market volatility, technical metrics, conditions, and financial obligations before chopping and changing the crypto-allocated portfolio.
For instance, if you plan on adding to your Bitcoin-specific portfolio, check for the market sentiments, technical indicators, and other immediate factors. All these, provided you have already looked at the Bitcoin fundamentals while investing in the first place.
Also, if you are Ethereum fanatic and hopeful of a merge-led upmove, it might just make sense to allocate an additional percentage right before the era-defining move. However, the allocation should be directly proportional to the portfolio performance period.
Long story short: while 1% seems like the safest bet, according to most experts and financial advisors, it doesn’t consider the human element. And that includes the affinity for risk, if any, timeframe of holding, and more.
Keeping every aspect in mind, you should try and keep your crypto portfolio dynamic by playing around with 1% to 5% investment value, depending on changing market conditions, existing risks, volatility, returns promised by other funds, and more. In crypto or any other investment, there should always be room for changing the corpus value if and when needed. Yet, 1% to 5% seems like the desired ballpark.
If you have made up your mind, explore the Coin Set to pick the right crypto assets for your portfolio.
1. How much crypto does the average person own?
There is no point in generalising, but an average person usually allocates 0.5% to 1% of their portfolio to crypto. As per numerous discussions over social platforms, an average Bitcoin holder owns 0.00175 BTC.
2. What is a good amount of crypto?
3% to 5% of the entire portfolio allocated to crypto sounds like a good amount, but again, it varies from person to person.
3. How to store and protect your cryptocurrencies?
Now that you have allocated a part of your portfolio towards crypto, it makes sense to get a reliable hardware/cold wallet or a secure online wallet to store and protect them.
4. What’s the biggest mistake people make when investing in crypto?
The biggest crypto investing mistake is greed, followed by panic. Never ride a wave blindly or get disheartened seeing a bit of red in your portfolio. Also, never invest a lot (like above 10%) in crypto if you have immediate financial obligations.