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“A little goes a long way”
Tara Moore | Peter | Getty Images
Katherine Dowling offers an analogy that might be useful to investors considering buy cryptocurrency like Bitcoin and I’m wondering what amount is appropriate.
It’s “like pepper spray,” said Dowling, general counsel and chief compliance officer at Bitwise Asset Management, a cryptocurrency manager. “A little goes a long way” in a portfolio, she explained earlier this month at Financial Advisor Magazine’s annual Invest in Women conference in West Palm Beach, Florida.
Cryptocurrencies are digital assets, a category that should be considered an “alternative investment,” Johnson said.
Other types of alterations can include private equity, hedge funds and venture capital, for example. Financial advisors generally view them as separate from traditional portfolio securities like stocks, bonds and cash.
Allocating 2% or 3% of one’s investment portfolio to crypto is “more than enough,” Johnson said.
Let’s say an asset grows 50% this year and an investor holds a 1% position. It’s like having a 5% position in another asset that has grown 10%, Johnson said.
Whether investors buy into crypto – and how much they hold – will depend on their risk tolerance and capacityJohnson said.
For example, long-term investors in their 20s can afford to take more risk because they have enough time to recover their losses. Such a person may be able to withstand substantial financial losses and may reasonably hold 5-7% of their portfolio in crypto, Johnson added.
However, that allocation probably wouldn’t be appropriate for a 70-year-old investor who can’t afford to subject their nest egg to significant losses, he said.
“Bitcoin and other cryptocurrencies are a highly speculative investment and involve a high degree of risk,” investment strategists at Wells Fargo Advisors wrote in a statement. note Last year. “Investors must have the financial capacity, sophistication/experience and willingness to bear the risks of an investment, as well as potential total loss of their investment.”
Cryptocurrency prices have seen crazy growth lately.
Bitcoinfor example, reached a record level earlier in March. It topped $73,000 at its peak, but has since fallen back below $69,000.
Bitcoin prices collapsed before 2022, and shed about 64% that year under $20,000. For comparison, the S&P 500 stock index lost 19.4%.
Prices have since quadrupled from their November 2022 low point as of Wednesday evening. They’re up more than 50% year to date, while the S&P 500 is up about 9%.
Bitcoin is about eight times more volatile than the S&P 500, Johnson wrote in a Journal of Financial Planning article in December 2022, citing data from the Digital Asset Council for Financial Professionals.
THE Cryptocurrency Volatility Index was approximately six times higher than the CBOE Volatility Index from Wednesday.
“It’s still an incredibly volatile asset,” Bitwise’s Dowling said. “It’s not for everyone.”
Investing in crypto just got easier for many investors after the Securities and Exchange Commission approved a slew of Bitcoin spot exchange-traded funds in January, a first for the asset class.
Investors may want to consider spread of costs in dollars in crypto, Johnson said. This involves buying little by little, until you reach your target allocation. Investors should also rebalance periodically to ensure that large crypto profits or losses do not change their target allocation over time, he said.