When it comes to investing in crypto, most investors focus on a single factor: future return. They want to know how high a crypto can go, and how soon. They might be willing to invest in highly speculative cryptocurrencies, as long as they have the potential to skyrocket in value.
But as Charles Schwab (SCHW 0.47%) — which offers crypto investing to clients and is getting ready to launch Schwab Crypto™ — outlines in a new report, how much you allocate to crypto can dramatically reshape the risk/reward profile of your portfolio. Even a relatively tiny 1% allocation to crypto could have an outsize impact on the performance of your overall portfolio. That has huge implications if you are planning to invest in crypto this year.
Beware crypto volatility
Let’s be honest here. When it comes to risk and reward, most investors assume that if a particular asset accounts for a certain percentage of a portfolio’s value, then it must account for the same percentage of that portfolio’s overall risk. But that simply isn’t the case, as Charles Schwab makes clear in its report.
There’s no better example of that than Bitcoin (BTC +0.47%), which has been tremendously volatile over its 16-year history. As a result, even a 1% allocation to crypto could have serious implications for your overall portfolio if the price of Bitcoin suddenly collapses.
Today’s Change
(0.47%) $365.49
Current Price
$78063.00
Key Data Points
Market Cap
$1.6T
Day’s Range
$77238.00 – $78178.00
52wk Range
$60255.56 – $126079.89
Volume
17B
Consider that over the past six months, the price of Bitcoin has dropped nearly 45%. And that’s nothing compared to how Bitcoin has performed in the past. In 2018, for example, Bitcoin fell off a cliff and lost 74% of its value before finally recovering. Are there any other assets in your portfolio that are that volatile? Probably not.
Is there a “correct” crypto allocation?
That being said, Charles Schwab says that there is no single “correct” crypto allocation. There are a number of factors to consider, including investment horizon and capacity for loss. Investors need to weigh factors that impact both performance and risk tolerance.
Image source: Getty Images.
Most likely, though, the optimal crypto allocation is somewhere between 1% and 5%. This is the Goldilocks range: not too high, and not too low. If you are a risk-averse investor looking for a little extra upside, then a 1% allocation probably makes the most sense. And if you are a risk-seeking investor, then a 5% allocation makes the most sense. Though avoiding crypto altogether might make sense for some investors.
In December 2024, for example, BlackRock suggested that a 1%-2% allocation to crypto makes sense for most 60/40 investors, i.e., investors who allocate 60% of their portfolio to stocks and 40% to bonds. Just like Charles Schwab, BlackRock found that crypto can start to have some very outsize impacts on a portfolio once you ratchet up your allocation much higher than that. At a 4% allocation, for example, Bitcoin accounted for 14% of overall portfolio risk in December 2024.
If crypto accounts for more than 5% of your total portfolio, then you could be playing with fire. Unlike most stocks, cryptocurrencies can — and do — fall to zero. And they can do so with astonishing rapidity.
Crypto trades 24/7 on a global basis, and it’s quite possible that you could wake up one day and find a significant percentage of your portfolio’s value erased overnight. That’s especially true if you’re dabbling in meme coins or other highly speculative cryptocurrencies.
As a result, the bulk of your overall portfolio allocation should be high-quality stocks and index funds that you can buy and hold for the long haul. If you choose to sprinkle in a little crypto, you should do so judiciously. Think of yourself as a chef, sprinkling in a tiny soupçon of spice for that little extra kick. Too much, though, and you might overpower the entire meal.
The big takeaway is that crypto is much more volatile than other asset classes, and wild price swings can dominate overall portfolio performance. If you are choosing an allocation to crypto greater than 1%, you need to understand how it impacts your overall risk-reward profile.
