In 2024, Bitcoin prices skyrocketed, triggering a wave of excitement among investors. However, financial experts are advising caution before allowing enthusiasm to lead to impulsive buying decisions. Given its highly volatile nature, they suggest that Bitcoin and other cryptocurrencies should form a minute portion of an investor’s portfolio, ideally not more than 5%. Some even advise steering clear of it completely.
Ivory Johnson, a certified financial planner and founder of Delancey Wealth Management, emphasized that your investment in Bitcoin should not be on par with your investment in traditional assets such as Nasdaq or the S&P 500. This is because highly volatile assets like Bitcoin can significantly impact your portfolio, even with a smaller allocation.
Bitcoin’s value soared in 2024, making it the best-performing investment of the year. Its price surged by roughly 125%, and it ended the year around a whopping $94,000. By contrast, the S&P 500, a US stock index, rose by 23%, and the tech-heavy stock index, Nasdaq, grew by 29%. The price surge was largely due to Donald Trump’s victory in the US presidential elections, which was expected to introduce deregulatory policies to boost cryptocurrency demand.
Despite the high returns, experts warn about the underlying risks associated with cryptocurrencies. As Amy Arnott, a portfolio strategist for Morningstar Research Services, puts it, “With high returns come high risk, and crypto is no exception.” Bitcoin has been nearly five times as volatile as US stocks since September 2015, and Ether has been nearly 10 times as volatile.
BlackRock, a renowned money manager, suggests a 1% to 2% allocation to Bitcoin in a diversified portfolio, citing its potential for adoption and the risk of price drops. They warn that going beyond this allocation would significantly increase Bitcoin’s share of a portfolio’s total risk.
In contrast, Vanguard, another asset manager, is more skeptical of cryptocurrencies. They view them as speculative rather than investment assets and currently have no plans to launch a crypto ETF or offer one on their brokerage platform.
Financial advisors recommend a dollar-cost-averaging strategy for those considering investing in Bitcoin. This strategy involves buying 1% at a time until reaching the target risk. They also advise that investments in cryptocurrencies should be held for the long term, similar to other financial assets, with Morningstar suggesting a hold period of at least 10 years.
In conclusion, while Bitcoin and other cryptocurrencies have shown impressive performance and potential for high returns, their volatility necessitates careful consideration and strategic planning for prospective investors.
