Adding Bitcoin to your investment portfolio can have a positive impact on your long-term returns, but it’s all about timing.
A report from the CFA Institute Research Foundation examined the impact of Bitcoin on a diversified portfolio between January 2014 and September 2020. During this period, a rebalanced quarterly allocation of 2.5% to Bitcoin improved the returns of a traditional portfolio of almost 24%.
This is a huge impact of a small allocation. This comes as no surprise: Bitcoin appreciated by around 2,875% over the period.
Pay close attention to results like this, which can make it seem like the more cryptocurrencies you buy, the better. This is really only true for early adopters – for example, if I had added the same amount of cryptocurrencies in December 2020, the impact until July 2022 would have been zero.
You can get too many new things, and this is especially true of cryptocurrency. Let’s take a look at how many cryptocurrencies you should have in your wallet.
How many cryptocurrencies should you own?
Most experts agree that cryptocurrencies should represent no more than 5% of your portfolio.
This amount is “small enough to keep an investor comfortable in times of high volatility, but also large enough to have a really positive impact on the portfolio if cryptocurrency prices rise,” says Bruno Ramos de Sousa, head of global expansion. by Hashdex.
Some experts, such as Aaron Samsonoff, chief strategy officer and co-founder of InvestDEFY, allow allocations of up to 20%. But the amount of cryptocurrencies that should be in your wallet ultimately depends on your risk tolerance and beliefs about cryptocurrencies.
In addition to outsized long-term returns, cryptocurrencies tend to have excessive volatility.
In the case of the CFA Institute study, the higher the allocation to Bitcoin, the higher the yield and the higher the volatility. Between January 2014 and September 2020, the traditional wallet without Bitcoin generated a return of 6.26% compared to the traditional wallet with a 2.5% allocation in Bitcoin, which produced an annual return of 8.6%. which also experienced greater 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 the Digital Assets Council of Financial Professionals and author of “The Truth About Crypto”.
Experts say a small amount can greatly improve your overall returns without putting you at risk of financial damage if your cryptocurrency investment drops significantly or even drops to zero.
“Adding some to your portfolio can be a great way to really reap the long-term gains knowing that if you don’t go big, you’re not running out of your entire investment portfolio,” says Acenseur Financier partner Callie Stillman.
What should my crypto wallet look like?
Once you have decided how much cryptocurrency to own, the question becomes which crypto assets to buy and how much to hold.
Edelman suggests four crypto wallet options. First, you can only own Bitcoin. It is the oldest and largest digital asset in the cryptocurrency market domain.
“When institutions invest, they usually only buy Bitcoin. It may not produce the highest earnings, but it will be the last to drop to zero, “he says.
As Bitcoin’s market dominance fades, it’s increasingly important to diversify your position to capture the full set of crypto opportunities, says Martin Leinweber, digital asset product strategist at MarketVector Indexes.
“Different assets offer significantly different return models and respond heterogeneously to Bitcoin withdrawals,” says Leinweber. “While short-term correlations may be high, long-term ‘Bitcoin is nothing like a gaming token like Axie Infinity or an exchange token like Binance Coin (BNB).’
A popular alternative to Bitcoin is Ethereum, the second largest cryptocurrency by market capitalization, with a market dominance of 18%. “Many believe it is of much greater utility for global trade and therefore will continue to grow in importance,” Edelman said. Many other coins and tokens are also based on the Ethereum blockchain.
You can also have a wallet that includes a mix of Bitcoin and Ethereum. “They are the Coca-Cola and Pepsi of cryptocurrencies,” says Edelman. Between them, you hold over 60% of the cryptocurrency market share.
Edelman suggests a 50-50 or 60-40 split in favor of your favorite piece. “Otherwise you are making a big bet” and “bets should be avoided as this asset class is already very risky”.
While larger coins like Bitcoin and Ethereum can make up a larger share of your wallet, holding smaller proportions of other crypto assets can improve your long-term returns, says Leinweber.
Find out about cryptocurrency ETFs
Owning cryptocurrencies directly is no longer your only option for investing in space. There are a variety of Bitcoin ETFs and blockchain ETFs that offer an easy way to get exposure to the cryptocurrencies in your portfolio.
Edelman points to the Bitwise 10 Crypto Index Fund (BITW), a market capitalization weighted ETF of the 10 largest digital assets. Being weighted by market cap means Bitcoin and Ethereum make up the bulk of the fund with over 90% of the total portfolio.
“Most passive cryptocurrency investors would be in a better position to focus on Bitcoin, Ethereum and / or a cryptocurrency index fund,” says Samsonoff. “Blockchain and single-name projects, even the largest, still have a lot of tail risk and based on risk it’s hard to beat Bitcoin, Ethereum or an index unless you’re an active researcher in space.”
Leinweber suggests a multi-token fund that tracks a market cap weighted index to ensure you are getting the return from the cryptocurrency market.
“You implicitly buy the winners and sell the losers,” he says, with the wealth manager doing the work for you and replicating the index.
Some cryptocurrency ETFs invest in publicly traded companies engaged in the cryptocurrency industry, such as cryptocurrency exchange Coinbase, cryptocurrency bank Silvergate Bank, and Bitcoin mining company Riot Blockchain, rather than buying cryptocurrencies directly.
Investment firms also offer separately managed accounts (SMAs), which are like custom mutual funds that own up to two dozen different cryptocurrencies.
“The account is managed specifically for you, with a truly personalized approach to rebalancing and collecting tax losses that you can’t do with funds,” says Edelman. The challenge for SMAs is that they usually have a minimum investment of INR 1,000.
The composition of a good crypto wallet
Stillman states that your cryptocurrency portfolio should look like any other part of your investment portfolio. It should be diversified and match your risk tolerance.
You should use the cryptocurrencies you have researched and feel comfortable investing. “Read the white papers on them to better understand how they work and what they are for,” she says. “Find out who is behind them and know their background.”
An important question is why you buy cryptocurrencies and your plans. Are you shopping because your friends told you so? Is it for short-term or long-term gain? What do you plan to do with the winnings you earn? “Some cryptocurrencies are liquid, some are not,” Stillman points out. “How important is it to you?
A good crypto wallet allows you to hold it through bearish and bullish markets without losing sleep overnight. “If the crypto portion of your portfolio is too large or concentrated in speculative altcoins, you risk having paper hands,” a term used to describe investors who sell out of fear at the first sign of a dip, says Samsonoff.
“Conversely, if you are underpowered, you risk becoming greedy when confirmation bias kicks in after the cryptocurrency rally and potentially buy a top after feeling sidelined on the upside,” he said.
Maintaining a long-term perspective, which means years and decades, is the key to managing your cryptocurrency portfolio. “It’s a new asset class, so it’s very volatile, and you need to focus on earning potential for decades, not weeks or months,” says Edelman.
Leinweber says that portfolios for a period of four years or more are generally profitable. “It’s an investment in new technology, not a get-rich-quick scheme.”
Many experts recommend using an average rupee cost strategy where you buy or sell a fixed amount of rupees, whatever happens. This can take the emotion out of the equation.
“Trying to time the market perfectly or check your portfolio every day generally leads to more stress and bad decisions. Instead, it’s best to have periodic re-evaluations of your positions and rebalances based on your changing view of the market, not much different from an equity portfolio, ”says de Sousa.
Otherwise, your cryptocurrency allocation could overwhelm your wallet and increase your overall risk.
“If you are not an active trader, you should have a consistent percentage allocation to cryptocurrencies and rebalance your target weights monthly or quarterly,” says Greg King, founder and CEO of Osprey Funds.
Keeping track of your crypto wallet can be a challenge.
The most important tip when tracking your cryptocurrency wallet is to align your thesis timeline, says Samsonoff. Know your entry and exit trigger before you start.
“Without a clear plan, you will test your belief – or lack thereof – and succumb to emotional decisions based on the volatility of the crypto space,” he says.