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Crypto Amount That Should Be In Your Investment Portfolio

CRYPTO AMOUNT IN YOUR INVESTMENT PORTFOLIO

May 25, 2021 | 

JOHN K MWANIKI |  0 Comments| 

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People are increasingly adopting cryptocurrencies, and some of them can't help but wonder how much of their investment portfolio should be in crypto. Cryptocurrencies are a highly volatile asset, and figuring out how much to invest in is the biggest challenge. Price notwithstanding, digital currencies and their underlying technology, blockchain, are here to stay, which means that they will play a critical role in diversifying investment portfolios.

The increasing interest of institutional investors in bitcoin

Notable companies like PayPal and tesla Inc currently support cryptocurrencies as a payment method. That means cryptocurrencies are becoming a popular feature in the financial industry and a part of a well-rounded investment portfolio.

The total market cap of cryptocurrencies just exceeded $2trillion, and it becomes almost too difficult for institutional investors to ignore. Shark Tank celebrity investor, Kevin O'Leary who previously termed bitcoin as garbage and went ahead to release a video titled 'Why I'm not investing in Bitcoin,' also recently changed his tune. In March this year, he announced that he would be allocating 3% of his investment portfolio to bitcoin. Based on his net worth of $400million, his bitcoin allocation percentage translates to $12million worth of BTC.

In August 2020, the huge company MicroStrategy allocated $250million of their investment to bitcoin, and since then, they have spent an entire sum of $2.226billion on bitcoin. Another major company, Payment service square Inc also made a significant move in October 2020 and invested $50million in bitcoin and recently added another $170million. 

Then Tesla Inc followed suit and, in February 2021, invested $1.5billion in cryptocurrencies. All these institutional investments in the cryptocurrency industry are an indication that digital currencies are heading in the right direction in terms of growth. The increasing interest in crypto by the big players has also influenced small-scale investors interested in making smart investment moves.

First, understand cryptocurrencies

If you want to make cryptocurrencies a part of your investment portfolio, you must first understand them. Investment companies are playing a pivotal role in providing potential investors with more crypto explainers. For instance, Fidelity Investments released a report titled 'understanding bitcoin' where Jurrien Trimmer explains bitcoin's potential growth and compares it to other investment assets to help potential crypto investors understand it better.

According to Trimmer, a large number of investors consider bitcoin as a unique and legitimate asset class. He describes bitcoin as a finite asset with a distinct supply and demand dimension. Its distributed nature allows a network effect that is not similar to other assets. That means bitcoin's value will grow faster than its network of participants. 

However, its growth curve is still in its early phase and will possibly remain so for several years. Its supply remains at a fixed amount of 21million, and its demand is growing exponentially, indicating a bullish sentiment for bitcoin in the crypto market.

Different crypto amount allocation suggestions

60/40 model

Some financial analysts have suggested crypto amount allocation on investment portfolios based on the 60/40 model. According to Ark Invest CEO Cathie Wood, bitcoin and other cryptocurrencies will become a standard part of the recommended investment portfolios for investors. The bond allocations of these portfolios will eventually give way to cryptos.

6% bitcoin in a portfolio

Another suggestion for the right crypto amount allocation in an investment portfolio comes from Yale Economist Aleh Tsyvinski. According to his study, cryptocurrencies have higher potential profits than other asset types regardless of their volatility. He says that an investment portfolio should contain 6% of bitcoin for optimal construction. For bitcoin skeptics, an allocation of 4% is suitable to achieve diversification, while a 1% allocation is suitable for those very cautious of cryptocurrencies.

Ric Edelman suggestion

Ric Edelman, the founder of Edelman Financial Engines, suggests that replacing only 1% of the 60% stock allocation with a crypto amount is best to give investors the benefit of diversification without risking their portfolio. According to him, 1% crypto investment will not materially harm an investor, won't interfere with their finances, or prevent them from achieving their goals. He insists that cryptos are necessary for diversification as they have less correlation with other asset classes.

The Black-Litterman model

Financial experts come with varying suggestions of how much crypto amount one should include in their investment portfolio. But how can a retail investor decide? Here is a model that uses an objective approach and considers investors' preferences.

The Black Litterman approach begins with a neutral equilibrium portfolio. Then it offers a formula for increasing the investor's holdings based on their perception of the world. That means it integrates the investor's growth estimation and their confidence in the estimate.

The neutral starting point is the global asset holdings. In the total asset market globally, bonds cover 51.98%, stocks 47.03%, and crypto 0.99%. As such, the investment portfolio should include the same allocation. For any growth rate in crypto, the model returns the amount an individual should have in their portfolio. When the investor specifies their conviction level in the assumed rate growth, the model adjusts.

Small allocations to crypto

Many financial analysts advise investors to allocate only a small crypto amount to their investment portfolios of no more than 10%. Digital assets are not correlated to other asset classes, and they do well in improving diversification in the ever-growing global market.

Understand the risks

Even if you are making a small crypto amount allocation to your investment portfolio, you must understand the risks. Take the time to understand more about digital assets and blockchain technology. 

According to Ric Edelman, do not invest until you understand the technology; otherwise, you will be spending not investing. He further adds that investors should get into the crypto investment market with a long-term sentiment and be prepared for volatile seasons and the chances of a 100% loss.

THE BOTTOM LINE

For beginners, do not invest in cryptos more than you can afford to lose.

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