At Betterment, we recommend investing 5% or less of your investable assets (your investable cash, stocks, bonds, mutual funds, exchange-traded funds, etc.) in crypto.
Assuming you are a long-term investor, a simple way to think about this is to ask yourself how confident you are that the crypto industry will continue to grow over time. Then decide how much you want to invest into a diversified portfolio based on that, no more than 5% of your investable assets.
Where does the 5% golden rule come from?
Using some math with fancy terms like the Black-Litterman model, our investing experts can calculate our maximum recommended crypto allocation. To get to our recommended allocation, the model takes into consideration our analyst’s answers to two important questions:
How much, by percent, will crypto outperform stocks per year?
In terms of probability, how confident are you that crypto will outperform stocks?
Answers to both of the questions above exist on a spectrum, meaning that individuals may have different answers to the two questions. By plugging in the answers to those two questions into the Black-Litterman model, our experts recommend no more than 5% if you have high confidence that crypto will significantly outperform stocks. Many individuals may not be as confident in crypto outperforming stocks. In this case, we would recommend allocating less than 5% to match your comfort level.
Allocation then diversification.
Once you settle on your preferred crypto allocation of 5% or less, remember to consider diversification. All of our Crypto Investing portfolios are designed to offer broad diversification across many crypto assets.
As an enthusiast and expert in the field of cryptocurrency investments, I have extensive knowledge and hands-on experience navigating the complex landscape of digital assets, investment strategies, and risk management within the crypto market.
The article "Our golden rule to investing in crypto" by Mychal Campos, Head of Investing at Betterment, elucidates the approach to investing in cryptocurrency, emphasizing the significance of prudent allocation and diversification within one's investment portfolio.
The 5% golden rule advocated by Betterment recommends investing 5% or less of your investable assets in cryptocurrency. This approach stems from a comprehensive evaluation using the Black-Litterman model, a sophisticated mathematical framework employed by their investing experts. This model integrates analysts' responses to pivotal questions:
Crypto Outperformance: The model considers the percentage by which cryptocurrency is expected to outperform stocks annually.
Confidence Level: It assesses the probability or confidence levels that investors have regarding crypto's ability to outperform stocks.
These questions encompass a spectrum of potential answers, acknowledging the variability in individual opinions and beliefs regarding the future performance of cryptocurrency compared to traditional stocks.
The utilization of the Black-Litterman model allows Betterment's experts to determine the maximum recommended allocation to crypto. If investors possess a high level of confidence that crypto will significantly outperform stocks, the recommendation is to allocate no more than 5% of their investable assets. However, for those less assured of crypto's potential to outperform stocks, a lower allocation is suggested to match their comfort levels.
Once the preferred crypto allocation is established (5% or less), the article emphasizes the importance of diversification within the crypto investment portfolio. Betterment's Crypto Investing portfolios are specifically designed to ensure broad diversification across numerous crypto assets, minimizing risk by spreading investments across multiple cryptocurrencies.
The article provides valuable insights for investors, underscoring the significance of strategic allocation, risk assessment, and diversification when considering cryptocurrency as a component of one's investment portfolio.
Most financial experts recommend limiting crypto exposure to less than 5% of your total portfolio. Crypto is considered a high-risk asset class. Limiting allocation helps manage overall volatility and risk. Those new to crypto investing may start with 1% to 2% as an introduction.
For people who can handle more risk and enjoy altcoins, many investors go 25% Bitcoin, 25% Ethereum, then the remainder can be allocated to riskier small-cap altcoin plays. A popular strategy is 25% Bitcoin, 25% Ethereum, then the remaining 50% spread across the various layer one Ethereum competitors.
However, some experts recommend keeping crypto investments to around 5-10% of your overall portfolio. This is because crypto is considered to be a high-risk, high-reward investment, so it's important to balance it out with other, more stable investments.
Also known as the Pareto Principle, the 80/20 rule states that roughly 80% of results come from just 20% of efforts. This concept holds true in many areas of life and business, including crypto investing. When it comes to cryptocurrencies, the same principle applies.
Most financial experts recommend limiting crypto exposure to less than 5% of your total portfolio. Crypto is considered a high-risk asset class. Limiting allocation helps manage overall volatility and risk. Those new to crypto investing may start with 1% to 2% as an introduction.
The Rule of 90 is a grim statistic that serves as a sobering reminder of the difficulty of trading. According to this rule, 90% of novice traders will experience significant losses within their first 90 days of trading, ultimately wiping out 90% of their initial capital.
The same-day rule in share pooling determines the cost basis based on the cost of crypto acquired on the same day, helping prevent 'bed-and-breakfasting' tax avoidance. The 30-day rule states that if a crypto asset is sold and repurchased within 30 days, the cost basis is the purchase cost of the newly acquired asset.
How much money do I need to start investing in cryptocurrency? In theory it takes only a few dollars to invest in cryptocurrency. Most crypto exchanges, for example, have a minimum trade that might be $5 or $10. Other crypto trading apps might have a minimum that's even lower.
Having your investments spread out over a number of coins is recommended. We'll get into some concrete examples below, but a well-diversified portfolio usually contains a blend of small, mid and large-cap coins which span a range of cryptocurrency types. The 80/20 rule is a good starting point if you're new to crypto.
Adding a modest allocation of cryptocurrencies (up to 6%) to a traditional 60/40 portfolio can substantially improve the portfolio's Sharpe ratio with a relatively minor impact on drawdown. An allocation close to 70/30 between bitcoin and ether for a crypto-only portfolio provided the best risk-adjusted returns.
A well-balanced portfolio may include a combination of large-cap cryptocurrencies like Bitcoin and Ethereum, mid-cap and small-cap altcoins with growth potential, stablecoins for stability, and possibly some niche tokens or assets for diversification.
At 5%, the bitcoin allocation contributes over 20% of the portfolio's total risk and produces a volatility that's roughly 16% over the 60/40 portfolio. A 10% allocation increases volatility by 41%. With a 25% allocation, the contribution to risk leaps to 83% when sourced from equities.
Failed exchange FTX has kept crypto in the news, but only 28% of Americans have held some form of crypto. After removing the top and bottom 1% of survey respondents, the average amount invested in crypto is $7,738, with a median of $500.
While this is a lower-bound scenario, we can use it as a baseline to show what it takes for investors to become Bitcoin millionaires. Assuming an annualized return of 30%, one would need to invest roughly $85,500 annually for five years to hit millionaire status. Over 10 years, this number falls to around $18,250.
Most experienced crypto traders aim for at least 50% profit margin. You can aim for 100% profit margin, or even higher. If, for instance, your investment increases by 100%, it would be alluring to see where it goes. However, be aware that crypto market is volatile and if price climbs to new highs fast.
If you wish moderate growth, keep 60% of your portfolio in stocks and 40% in cash and bonds. Finally, adopt a conservative approach, and if you want to preserve your capital rather than earn higher returns, then invest no more than 50% in stocks.
Introduction: My name is Trent Wehner, I am a talented, brainy, zealous, light, funny, gleaming, attractive person who loves writing and wants to share my knowledge and understanding with you.
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