Bitcoin Soared in 2024. How Much Should You Own, If Any? – NBC4 Washington

• Bitcoin was the best performing asset class in 2024, up approximately 125%. For comparison, the S&P 500 rose 23%.
• However, investors should only own a small share of crypto due to its volatility – typically no more than 5% of total holdings, experts say.
• Some people think that cryptocurrencies have no place in investment portfolios.
• Investors should plan to hold bitcoins for the long term and at an average cost.

Bitcoin prices have skyrocketed in 2024. But you may want to exercise caution before euphoria sends you into a frenzy of hasty buying.

Bitcoin and other cryptocurrencies should generally be considered just a flash of investors’ portfolios — typically no more than 5% — due to its extreme volatility, according to financial experts.

Some investors might be better off staying away from it altogether, they said.

“You won’t have the same size allocation in Bitcoin as you would Nasdaq or the S&P500” said Ivory Johnson, certified financial planner and founder of Delancey Wealth Management, based in Washington, DC.

“Anytime you have a really volatile asset class, you need less of it in the portfolio to have the same impact” as traditional assets like stocks and bonds, CNBC fellow Johnson said. Council of Financial Advisors.

Why Bitcoin Prices Rise in 2024

Bitcoin, the largest cryptocurrency, was the best performing investment of 2024, by far. Prices jumped about 125%, ending the year around $94,000 after starting around $40,000.

For comparison, the S&P 500, an American stock index, increased by 23%. The Nasdaq, a technology-heavy stock index, rose 29%.

Prices exploded after Donald Trump’s victory in the US presidential election. His administration is expected to adopt deregulation policies that would boost demand for crypto.

Last year, the Securities and Exchange Commission also – for the first time – approved exchange traded funds that invest directly in bitcoin And ether, the second largest cryptocurrency, making it easier for retail investors to buy crypto.

But experts have warned that high profits could hide an underlying danger.

“With high returns comes high risks, and crypto is no exception,” said Amy Arnott, portfolio strategist for Morningstar Research Services. wrote in June.

Bitcoin is nearly five times more volatile than U.S. stocks since September 2015, and ether is nearly 10 times more volatile, Arnott wrote.

“A portfolio weight of 5% or less seems conservative, and many investors may want to ignore cryptocurrencies altogether,” she said.

1% to 2% is “reasonable” for bitcoin, says BlackRock

Bitcoin lost 64% and 74% of its value in 2022 and 2018, respectively.

Mathematically, investors need a 100% return to recover from a 50% loss.

So far, crypto’s returns have been high enough to offset its added risk — but it’s unclear whether that trend will continue, Arnott said.

There are several reasons for this: Crypto has become less valuable as a portfolio diversifier as it has become more mainstream, Arnott wrote. Its popularity among speculative buyers also “makes it vulnerable to price bubbles that will eventually burst,” she added.

BlackRock, a fund manager, believes it makes sense to hold Bitcoin in a diversified portfolio, for investors who are comfortable with the “risk of potentially rapid price declines” and believe it will be more widely adopted, experts from the BlackRock Investment Institute. wrote early December.

(BlackRock offers a Bitcoin ETF, the iShares Bitcoin Trust, IBIT.)

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A 1-2% allocation to bitcoin is a “reasonable range,” BlackRock experts wrote.

Going beyond that would “significantly increase” bitcoin’s share of a portfolio’s total risk, they said.

For example, a 2% bitcoin allocation represents about 5% of the risk of a traditional 60/40 portfolio, BlackRock estimated. But a 4% allocation brings that figure to 14% of total portfolio risk, he says.

More “speculation” than investment?

In comparison, Vanguard, another asset manager, is not currently considering launching a crypto ETF or offering one on its brokerage platform, officials said.

“In Vanguard’s view, crypto is more speculation than investment,” Janel Jackson, Vanguard’s former global head of ETF capital markets and broker-dealer and index relations, wrote in January 2024.

Stock investors own shares of companies that produce goods or services, and many investors receive dividends; bond investors receive regular interest payments; and commodities are real assets that meet consumption needs, Jackson wrote.

“Although crypto has been classified as a commodity, it is an immature asset class that has little history, no inherent economic value, no cash flow and can create havoc within a portfolio,” wrote Jackson, now an executive in the company’s financial advisory services. unit.

Average dollar cost and long-term retention

Ultimately, according to financial advisors, the total cryptocurrency allocation depends on the investor’s appetite and ability to take risks.

“Younger, more aggressive investors could allocate more (crypto) to their portfolios,” said Douglas Boneparth, a New York-based CFP and CNBC advisory board member.

Investors typically hold about 5% of their traditional 80/20 or 60/40 portfolio in crypto, said Boneparth, president and founder of Bone Fide Wealth.

“I think it might be a good idea to have some exposure to Bitcoin in your portfolio, but it’s not for everyone and it will remain volatile,” Boneparth said. “When it comes to other cryptocurrencies, it’s difficult to determine which ones are likely to be a good long-term investment. That’s not to say there won’t be winners.”

Investors looking to buy cryptocurrencies should consider using a dollar cost allocation strategy, said Johnson of Delancey Wealth Management.

“I buy 1% at a time until I reach my target risk,” Johnson said. “And that way I’m not putting in 3%, 4%, 5% all at once and then something happens and it drops precipitously.”

It would also be prudent for investors interested in crypto to buy and hold it for the long term, as they would with other financial assets, Johnson said.

Morningstar suggests holding the cryptocurrency for at least 10 years, Arnott wrote.