With the price of Bitcoin resurgent — driven in part by the Securities and Exchange Commission (SEC)'s January approval of spot Bitcoin exchange-traded funds — there has been renewed interest in the cryptocurrency space recently.
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This also brought not only institutional legitimacy to the space, but also easy access to cryptocurrencies, as the numbers prove. As of April 9, Bitcoin ETFs held $56.35 billion in assets under management, according to data from The Block.
“Many investors are considering allocating to cryptocurrencies in their retirement or tax advantaged accounts given the historical trend of crypto assets to provide outsized returns,” said Rayhana Sharif Askari, head of product and research at Grayscale. “When making this decision, investors should consider their cryptocurrency allocation in the context of their broader investment portfolio, their risk appetite and their income needs.”
Grayscale is one of the companies that launched a spot Bitcoin ETF in January. As of April 9, it had $23.1 billion in assets under management.
Underscoring the growing interest, an Unchained survey found that 23% of US investors who do not own Bitcoin would consider investing in the asset through a 401(k), IRA, or other retirement plan in 2024.
Now, while experts recommend diversification as the cornerstone of a safe and well-rounded retirement portfolio, advice varies when it comes to including cryptocurrencies in said portfolios.
So how much cryptocurrency should be included in retirement portfolios?
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less than 5%
Many experts are of the opinion that given the inherent volatility, investors should allocate no more than 5% to cryptocurrencies.
“The allocation to cryptocurrencies in a retirement portfolio can vary depending on an individual’s risk tolerance and financial goals,” said Michael Collins, CFA and Founder/CEO of WinCap Financial. “However, our general guideline would be to allocate less than 5% of portfolio to crypto assets. In the interest of transparency, our clients do not own cryptocurrencies within their retirement portfolios because we believe we can get a better risk-reward profile than small stocks.”
Grayscale's Sharif Askari echoed the above sentiments, saying that research suggests that approximately 5% of a portfolio allocation to cryptocurrencies may lead to higher risk-adjusted returns on average, albeit with higher portfolio volatility, for investors who may hold a classic mix. Of stocks and bonds.
“Cryptocurrencies are a volatile asset class, so a little goes a long way,” Sharif Askari added.
Learn More: 13 Cheap Cryptocurrencies with the Highest Upside Potential for You
Target 5% to 10%
Although cryptocurrencies are generally considered a risky asset, Michal Rozanski – co-founder and CEO of Empirica – argued that they still offer one of the highest risk-reward ratios among asset classes.
“Therefore, we recommend allocating 5% to 10% of your retirement portfolio to it, depending on when you retire,” Rozanski said. “We expect the volatility of these assets to remain high, but the low correlation between cryptocurrencies and traditional asset classes will enhance diversification in the retirement portfolio.”
Stephen Kates, CFP and principal financial analyst for Annuity.org, agreed with this hypothesis. He said investors should not put more than 5 to 10% of their investment portfolio into any one specific investment, and should not exceed these limits because most cryptocurrencies have a high correlation with each other.
“Correlation is the probability that two or more investments will move in the same direction at the same time. This may seem great when prices are rising, but it can be disastrous for your portfolio when prices are falling,” he added.
It depends entirely on your circumstances
Cliff Ambrose – FRC and founder/wealth manager at Apex Wealth – argued that when considering incorporating cryptocurrencies into a retirement portfolio, the optimal allocation depends on various factors. These include risk tolerance, investment objectives and time horizon.
However, while there is no one-size-fits-all answer, he also said that financial experts often recommend a conservative approach, with cryptocurrency allocations typically ranging from 1% to 5% of the total portfolio.
“This allocation can provide exposure to the potential upside of cryptocurrencies while mitigating the inherent volatility and risks associated with this asset class,” he added.
Other experts also noted that asset allocation requires a long-term mindset, but protects your net worth from short-term fluctuations.
“So, what is volatile is typically a smaller portion of the portfolio compared to traditional stable investments like dividend-paying stocks and high-quality bonds,” said Vijay Marulia, co-founder of The Cash Square. “Since cryptocurrencies are so volatile, I advise people to start with a small amount and average the dollar cost over time.”
nothing at all?
On the other end of the spectrum, some experts advise against including cryptocurrencies in retirement portfolios at all — saying they are too risky and resemble speculative investments.
“The answer is simple, zero,” said Dr. Robert Johnson, professor of finance at Creighton University's Heider School of Business. “The cryptocurrency market has never been a good place to invest. Sometimes it has been a profitable place for some to speculate. My belief is ‘Just say no!’ should guide your actions regarding cryptocurrencies and retirement accounts.”
According to Johnson, investing in Bitcoin and other cryptocurrencies is pure speculation.
“Cryptocurrencies don’t produce anything — a fact that Warren Buffett eloquently explained at Berkshire Hathaway’s annual meeting in May,” he said.
Other experts also noted that they find it difficult to see an argument for why an unproven speculative asset class should bear the burden of providing support for a way of life over many decades.
As such, Jake Falcon – CEO of Falcon Wealth Advisors – has argued that cryptocurrencies do not belong in a retirement portfolio at all.
He added: “Cryptocurrencies should only be considered with assets that they are willing to lose completely and that are not earmarked for something as important as retirement.”
As Scott Lieberman, founder of Touchdown Money, has argued, if you're older and need to protect what you have — because you no longer have a lot of time to make up what you lost — you're better off limiting your cryptocurrency investment.
“Cryptocurrencies are a high-risk opportunity, so you have a much greater chance of going to zero compared to stocks or mutual funds. If you're in your 30s, you can handle a loss like this. If you're in your late 50s, taking this loss can It would be a disaster.”
Cryptocurrency investments: what is the method?
Nowadays, there are several ways to include cryptocurrencies in retirement accounts, especially with spot Bitcoin ETFs opening the door to easier access.
One of the key factors to take into consideration is diversification. Don't put all your eggs in one basket, according to WinCap's Collins.
“This could mean investing in different cryptocurrencies, such as Bitcoin, Ethereum, and Litecoin, as well as looking at other types of assets such as stablecoins or decentralized finance (DeFi) tokens,” he suggested.
“It is also important to take into account the volatility of the cryptocurrency market and regularly re-evaluate the portfolio to ensure that the allocation is in line with the individual’s overall financial plan and risk tolerance,” he added.
When it comes to ETFs, they offer a more diversified and regulated approach to investing in cryptocurrencies. This may appeal to retired investors looking for more security and convenience, according to Apex Wealth's Ambrose.
Ultimately, Ambrose noted that the decision on the allocation and type of crypto assets in a retirement portfolio should be aligned with an individual's risk tolerance, investment goals, and overall financial strategy.
He concluded that seeking guidance from a financial advisor who understands traditional retirement planning and the nuances of investing in cryptocurrencies can help investors navigate this evolving landscape effectively.
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This article originally appeared on GOBankingRates.com: How Much Cryptocurrency Should You Be Part of Your Retirement Portfolio?
