Should Your Portfolio Include Cryptocurrency?

Observing the swift ascent of Bitcoin without participating has been challenging for numerous individuals, especially as they see others amassing significant wealth from the rise in digital currencies. There are frequent conversations with those considering investing in Bitcoin and other cryptocurrencies.
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This blog's focus is a summary of perspectives on how cryptocurrency fits into an investment portfolio. The excitement can be captivating, particularly when the internet is replete with accounts of people who turned a $100 investment in 2010 into millions today. 

​Should I Include Cryptocurrency in My Portfolio?

The question of whether to include cryptocurrency in your portfolio is largely dependent on your personal risk tolerance. However, the general agreement is that cryptocurrency constitutes an important new asset class that is likely here to stay.

Given the extreme volatility associated with cryptocurrencies, limiting such investments to a small fraction of your portfolio is recommended. In other words, aim for a cap of 5% and avoid putting all your retirement savings into it.

Analysis shows that having a minor percentage of cryptocurrency in your portfolio could have boosted your overall returns marginally while increasing the overall risk over the past five years. For instance, based on historical returns from the past five years for a hypothetical 70/30 stock/bond portfolio, allocating 3% of your portfolio to cryptocurrency instead of stocks (resulting in a 3/67/30 portfolio) would have increased overall returns by as much as 42%.

However, remember that including cryptocurrency in your portfolio also amplifies its overall volatility; with the proposed 3/67/30 portfolio, total portfolio volatility surged by 18%. The long-term return and behavior of crypto exchanges like SOL to USD are still largely unknown, unlike bonds and stocks with centuries of data backing them. It can be argued that as more capital is poured into cryptocurrency, the rates of return may decrease, leading to lower volatility.

​Are Cryptocurrencies a Risky Investment?

Compared to traditional stock market securities, cryptocurrencies like Bitcoin generally present higher risk. The main reason for this is the volatility typically associated with cryptocurrencies. Given that cryptocurrencies have not been around as long as the stock market, historical data is scarce to guide investors in constructing robust portfolios. Furthermore, the regulatory landscape of cryptocurrencies is still under debate and fraught with uncertainties.
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The investment in cryptocurrencies is often characterized as "extremely volatile" and "highly risky". This is primarily attributed to the frequent sharp rises and falls in cryptocurrency values. While these sudden shifts may offer the potential for significant gains, they require impeccable timing. Misjudging the market could lead to considerable financial losses for investors.

​Cryptocurrency vs. Stocks

Cryptocurrency, notoriously associated with high-profile illegal activities such as the theft of $320 million worth of assets, carries certain inherent risks. Not only does it result in individual victimization, but it also undermines investor trust, leading to a potential decline in further investment in these assets. A notable instance from 2011 saw Bitcoin's value plummet by 94% following a major hack.

Nevertheless, fraudulent activities in relation to the total transactions have shown a downward trend over time, currently estimated to constitute a mere 0.15% of all crypto transactions. This relatively small fraction signifies a decrease in risk. Cryptocurrencies and the stock market are governed by the same regulatory bodies, adding an extra layer of security.

Today, the value of cryptocurrencies has reached a staggering $1.9 trillion. This is a testament to investor confidence and familiarity with this domain. While it may be argued days of phenomenal asset growth in the early stages of cryptocurrency are in the rear-view mirror, the trade-off appears to be an increase in legitimacy, investor trust, and protective measures.

Endnote

​Although cryptocurrency has potential as an investment vehicle, it is still a highly risky venture. Ultimately the decision to invest in Cryptocurrency rests upon each individual's unique financial circumstances and goals. Cryptocurrency can offer high rewards if managed properly but it carries with it a great burden of responsibility