How Much Cryptocurrency Should There Be in Your Wallet – Forbes Advisor

Editorial note: We earn commission from partner links on Forbes Advisor.  Commissions do not influence the opinions or ratings of our editors.

Adding Bitcoin to your investment portfolio could have a positive impact on your long-term returns, but it’s all a matter of timing.

A report from the CFA Institute Research Foundation examined the impact of Bitcoin on a diversified portfolio between January 2014 and September 2020. Over this period, a rebalanced 2.5% quarterly allocation to Bitcoin improved the returns of a traditional portfolio of almost 24%.

This is a huge impact from a small allocation. Also, unsurprisingly: Bitcoin appreciated by around 2,875% over the period.

Pay close attention to results like this, which can make it seem like the more cryptocurrencies you buy, the better. This is only true for early adopters, for example, if I had added the same amount of cryptocurrencies in December 2020, the impact until July 2022 would have been almost zero.

You can get too many new things, and this is especially true of cryptocurrency. Let’s take a look at how much cryptocurrency you should have in your wallet.

How many cryptocurrencies should you own?

Most experts agree that cryptocurrencies should make up no more than 5% of your portfolio.

This amount is “small enough to keep an investor comfortable in times of high volatility, but also large enough to have a really positive impact on the portfolio if cryptocurrency prices rise,” says Bruno Ramos de Sousa, head of global expansion. by Hashdex.

Some experts, such as Aaron Samsonoff, chief strategy officer and co-founder of InvestDEFY, allow allocations of up to 20%. But the amount of cryptocurrencies that should be in your wallet ultimately depends on your risk tolerance and beliefs about cryptocurrencies.

In addition to outsized long-term returns, cryptocurrencies tend to have excessive volatility.

In the case of the CFA Institute study, the higher the allocation to Bitcoin, the higher the yield and the higher the volatility. Between January 2014 and September 2020, the traditional wallet without Bitcoin produced a return of 6.26% compared to the traditional wallet with a Bitcoin allocation of 2.5%, which produced an annual return of 8.6%, which it also saw greater volatility.

“The potential for outsized returns coupled with the significant risks of this emerging asset class means that a very small allocation is sufficient,” says Ric Edelman, founder of the Digital Assets Council of Financial Professionals and author of “The Truth About Crypto”.

Experts say a small amount can materially improve your overall returns without leaving you at risk of financial damage if your cryptocurrency investment drops significantly or even drops to zero.

“Adding some to your portfolio can be a great way to really take advantage of the long-term gains, knowing that if you don’t get big, you’re not out of your entire investment portfolio,” says Callie Stillman, partner at Financial Lift.

What should my cryptocurrency wallet look like?

Once you have decided how much cryptocurrency to own, the question becomes which crypto assets to buy and how much to hold.

Edelman suggests four cryptocurrency wallet options. First, you may only own Bitcoin. It is the oldest and largest digital asset in the cryptocurrency market domain.

“When institutions invest, they typically only buy Bitcoin. It may not produce the highest earnings, but it will be the last to go to zero, “he says.

As Bitcoin’s market dominance fades, it’s increasingly important to diversify your position to capture the full set of crypto opportunities, says Martin Leinweber, digital asset product strategist at MarketVector Indexes.

“Different assets offer significantly different return models and respond heterogeneously to Bitcoin pullbacks,” says Leinweber. “While short-term correlations may be high, long-term” Bitcoin has nothing to do with a gaming token like Axie Infinity or an exchange token like Binance Coin (BNB). ”

A popular alternative to Bitcoin is Ethereum, the second largest cryptocurrency by market capitalization, with 18% dominance in the market. “Many believe it has far greater utility for global trade and therefore will continue to gain prominence,” says Edelman. Many other coins and tokens are also based on the Ethereum blockchain.

You may also have a wallet that includes a mix of Bitcoin and Ethereum. “They are the Coca-Cola and Pepsi of cryptocurrencies,” says Edelman. Between them, you have more than 60% of the cryptocurrency market share.

Edelman suggests a 50-50 or 60-40 split in favor of your favorite coin. “Otherwise, you are making a big bet” and “bets should be avoided as this asset class is already very risky”.

While larger coins like Bitcoin and Ethereum can make up a larger share of your wallet, keeping smaller proportions of other crypto assets can improve your returns over the long term, says Leinweber.

Check out cryptocurrency ETFs

Owning cryptocurrencies directly is no longer your only option for investing in space. There are a variety of Bitcoin ETFs and blockchain ETFs that provide an easy way to get exposure to the cryptocurrencies in your portfolio.

Edelman points to the Bitwise 10 Crypto Index Fund (BITW), a market capitalization weighted ETF of the 10 largest digital assets. Being weighted by market cap means Bitcoin and Ethereum make up the bulk of the fund with over 90% of the total portfolio.

“Most passive cryptocurrency investors would be better suited to focus on Bitcoin, Ethereum and / or a cryptocurrency index fund,” says Samsonoff. “Blockchains and single-name projects, even the largest ones, still have a lot of tail risk, and based on risk, it’s hard to outperform Bitcoin, Ethereum or an index unless you’re an active researcher in space.”

Leinweber suggests a multi-token fund that tracks a market cap weighted index to ensure you are getting the return of the cryptocurrency market.

“You’re implicitly buying the winners and selling the losers,” he says, with the wealth manager doing the work for you and replicating the index.

Some cryptocurrency ETFs invest in publicly traded companies engaged in the cryptocurrency industry, such as cryptocurrency exchange Coinbase, cryptocurrency bank Silvergate Bank, and Bitcoin mining company Riot Blockchain, rather than buying cryptocurrencies directly.

Investment firms also provide separately managed accounts (SMAs), which are like custom mutual funds that own up to two dozen different cryptocurrencies.

“The account is managed specifically for you, with a truly personalized approach to rebalancing and collecting tax losses that you can’t do with funds,” says Edelman. The challenge for SMAs is that they usually have a minimum investment of tens of thousands of dollars.

The composition of a good cryptocurrency wallet

Stillman states that your cryptocurrency portfolio should look like any other part of your investment portfolio. It should be diversified and match your risk tolerance.

You should use the cryptocurrencies you have studied on and feel comfortable investing. “Read the whitepapers on them to better understand how they work and their purpose,” she says. “Find out who is behind them and know their track record.”

An important question is why you are buying cryptocurrencies and your plans. Are you shopping because your friends told you so? Is it for short or long term gain? What are you going to do with the earnings you make? “Some cryptocurrencies are liquid and some are not,” Stillman points out. “How important is it to you?”

A good cryptocurrency wallet allows you to hold it through the bear and bull markets without losing sleep at night. “If the crypto portion of your portfolio is oversized or concentrated in speculative altcoins, you risk having paper hands,” a term used to describe investors who sell out of fear at the first sign of a downturn, says Samsonoff.

“Conversely, if you are too small in size, you risk becoming greedy when confirmation bias kicks in after the cryptocurrency has strengthened and you could potentially buy a top after feeling sidelined on the way up,” he says.

How to manage your cryptocurrency wallet

Maintaining a long-term perspective, which means years and decades, is the key to managing your cryptocurrency portfolio. “This is a new and therefore very volatile asset class, and you should be focusing on profit potential for decades, not weeks or months,” says Edelman.

Leinweber says that portfolios over a period of four years or more are generally in profit. “It’s an investment in new technology and not a get-rich-quick scheme.”

Many experts recommend using an average dollar cost strategy where you buy or sell a fixed dollar amount regardless of what happens. This can take the emotion out of the equation.

“Trying to time the market perfectly or check your portfolio every day generally leads to more stress and bad decisions. Instead, it’s best to have periodic re-evaluations of your positions and rebalances based on your evolving view of the market, not much different from an equity portfolio, ”says de Sousa.

Otherwise, your cryptocurrency allocation could overwhelm your wallet and increase your overall risk.

“If you are not an active trader, you should have a constant percentage allocation to cryptocurrencies and rebalance your target weights monthly or quarterly,” says Greg King, founder and CEO of Osprey Funds.

How to track your cryptocurrency wallet

Tracking your cryptocurrency wallet can be a challenge.

The most important tip when tracking your cryptocurrency wallet is to align the timing of your thesis, says Samsonoff. Know your trigger for entry and exit before you begin.

“Without a clear plan, you will test your belief, or lack of it, and succumb to emotional decisions based on on the volatility of the crypto space, “he says.

Leave a Reply

%d bloggers like this: