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How Much Do Experts Recommend We Invest In Crypto??


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ecodebase2021/07/16 23:14
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"How much should I invest in crypto?" is a common beginner question that, unfortunately, there isn't a clear answer to. On one hand, some traditional financial experts will say that crypto is too risky and has no place in a portfolio whereas there are other people that YOLO their life savings into DOGE. At the end of the day, it really depends on who you ask, so in today's post, I want to share three separate perspectives. I'll discuss what mainstream investment advisors say about crypto, what crypto bulls say, and then I'll finish up by sharing my personal thoughts on crypto allocation.

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How Much Do Experts Recommend We Invest In Crypto??

"How much should I invest in crypto?" is a common beginner question that, unfortunately, there isn't a clear answer to. On one hand, some traditional financial experts will say that crypto is too risky and has no place in a portfolio whereas there are other people that YOLO their life savings into DOGE. At the end of the day, it really depends on who you ask, so in today's post, I want to share three separate perspectives. I'll discuss what mainstream investment advisors say about crypto, what crypto bulls say, and then I'll finish up by sharing my personal thoughts on crypto allocation. 

Mainstream Finance 

Mainstream finance is slowly embracing crypto with a notable institutional interest in BTC and ETH, but it seems that most financial advisors are slow to recommend cryptos due to the volatility. Most mainstream financial advice is based off of an an asset allocation model in which investors divide their investment classes such as stocks, bonds, real estate, commodities, currencies, etc. Although crypto isn't specifically listed as a class of its own, it would likely fall under either the "commodities" or "currencies" section of a portfolio.

In general, commodities and currencies are viewed as highly risky assets, and usually comprise no more than 5-10% of even a very aggressive portfolio. Even in an aggressive portfolio, experts recommend diversifying within the asset class, so although 5% of your portfolio might be "commodities" or "currencies" it would be highly unlikely for a mainstream advisor to recommend that the entire 5% be allocated to a single form asset such as crypto.It would be more likely that even within that 5% dedicated to currency or commodities, crypto would only be a small portion of that 5% so that you would be looking at around 1-2% total allocation to crypto. 

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Although a 1-2% allocation may seem dreadfully low to us crypto fans, I want to be clear that this represents a very optimistic allocation from a traditional finance perspective. For example, even under the "very aggressive" portfolio described by Investopedia, you will see that there is 0% allocated to crypto, commodities, or even foreign currencies. For more info on what allocations traditional financial planners suggest, feel free to check out this awesome article

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Crypto Based Advice

Although it wasn't surprising to find that traditional finance doesn't really embrace a crypto friendly portfolio, we also shouldn't be surprised that crypto based platforms suggest a much heavier allocation towards crypto. Thisarticle suggests that crypto allocation should range between 5-30% whereas this 19 year old Bitcoin millionaire suggests 10% of total income (not just investments) should go to crypto. Given that most financial experts recommend saving 10% of income, the decision to send 10% of total income to crypto would necessarily imply that 100% of investments would be going to crypto. 

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Clearly, there is a HUGE disconnect between traditional finance and crypto, but I think that around 5% seems to be a happy medium. A 5% allocation represents the upper limit of the most bullish traditional advisers and the lower limit of crypto based advice. I doubt 5% is the ideal for either side as traditional advisers would see it as a bit too risky whereas crypto advisers would see that as loosing out on a lot of potential. Although neither side would view the other's 5% recommendation as ideal, I do think that a 5% crypto allocation represents a good starting point in terms of portfolio allocation that can be adjusted up or down based on risk tolerance, preferences, etc. The 5% figure also seems to be supported by Jim Cramer as he recently recommended a 5% Bitcoin allocation.

What's My Take

As someone who spends every day writing crypto articles an learning about crypto, I thought it may be helpful to share my personal allocation and discuss why I find that allocation to be useful. To be honest, I haven't actually targeted a specific crypto allocation, but simply based on how things worked out, I feel comfortable with about a 3-4% allocation in crypto. This allocation would place me into the higher end of what traditional finance would recommend, but slightly lower than what crypto purists would recommend. 

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For some people, this allocation might seem low, and others might view at as high, but I think it strikes a good balance for my specific situation;  let me explain. I am a very risk adverse investor which means that I don't particularly like taking big gambles. I do realize that crypto is volatile and can have huge price swings in a single day, so I wouldn't feel comfortable putting too much into crypto. Placing a small 3-4% allocation in crypto makes me feel less nervous, and makes me less likely to panic sell during a crash. In my opinion, I'd rather have a steady 3-4% in crypto that I can rest easy with as opposed to a 10-15% allocation that keeps me glued to the TV watching to see the price charts or if the government has "banned" crypto yet. 

That being said, I also realize that crypto presents a HUGE opportunity for growth over the next few years, and I feel like contributing less than 1% to crypto as many suggest would cause me to FOMO a bit. The way I look at it, crypto has huge potential, and if the potential really is as bit as we think it is, even a small, steady investment can give huge returns.If Bitcoin really does go to 100 Quadrillion Zillion Dollars, does it really matter whether I have 1 BTC or 3 BTC? I doubt it. If crypto really does hit the highs many people are predicting, then simply having a bit of exposure could be life changing, and I'd rather comfortably put a small amount into a potentially life changing investment than feeling like i need to invest 30%, getting overwhelmed, and not investing at all. The 3-4% allocation lets me feel like I'm well position to take advantage of positive price movement while not worrying so much about the crashes. 

Summary

As with everything in life, it is possible to find views on both ends of the spectrum with some people advocating a very high percentage of investment into crypto an some people advising you to avoid it at all costs. Based on my research, it seems that 5% represents a good starting point for discussing the upper percent or a portfolio allocated to crypto. Of course, I'd like to hear your suggestions. What do you think is a reasonable allocation to crypto? Feel free to let me know.

As with everything, ANY investment you make is completely your own decision an you should do your own research and consult with a professional before making your choices. Thanks for reading!

References

https://www.forbes.com/sites/randywarren/2020/08/06/maximizing-your-portfolio-benefits-via-asset-allocation/?sh=4ffa1ac62700

https://www.investopedia.com/managing-wealth/achieve-optimal-asset-allocation/

https://www.interactivecrypto.com/how-much-do-you-need-to-start-crypto-investing

https://time.com/nextadvisor/investing/cryptocurrency/how-much-your-portfolio-should-be-crypto/

https://www.cnbc.com/2018/02/02/bitcoin-millionaire-says-this-is-how-much-to-invest-in-cryptocurrency.html

https://www.coindesk.com/jim-crater-bitcoin-powerball

Disclaimer: For various reasons, I should also say that this may or may not be my actual allocation of crypto and is instead designed to represent what I would consider ideal. 




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