If you are a Bitcoin enthusiast, you might like this post. We will talk about allocation to Bitcoins and other coins/tokens in a portfolio.
This will lead us to answer questions like –
- How much percentage of the portfolio to invest in Bitcoins?
- What percentage of the crypto portfolio should be Bitcoin
- How much of the portfolio should be in Bitcoin?
- What should be crypto portfolio percentages for different coins and tokens?
- What should be my crypto portfolio allocation?
- How much crypto in the portfolio to keep for the long term?
- What should be the Bitcoin percentage in the portfolio?
- What percentage of the crypto portfolio should be in Bitcoin?
Before I go any further, here is a warning – You shouldn’t invest in any cryptocurrency if you are still not properly handling important financial matters like having an emergency fund, paying off loans regularly, paying off credit cards in full each time, investing for financial goals, adequately funding your retirement plan, etc. Just because crypto is the new buzzword and everyone around you is talking about it, doesn’t mean you need to invest in it at all. Even before cryptos came into being in 2009, people were able to live their financial lives successfully.
Note – Whenever I mention the term Bitcoin, it means I am referring to Bitcoins as well as other cryptocurrencies as a group.
That said, let’s come back to the question at hand.
What percentage of portfolio to invest in Bitcoins?
Here is how I think how one can go about it.
I would say start with a few thousand Rupees first. Only invest that you won’t feel bad about losing.
But just putting some money in it will not do. If you do wish to eventually increase allocation to cryptos in your portfolio, then you also need to learn a lot about these coins and blockchain.
Once you begin learning about it, you can increase your allocation to say 1% of your portfolio. At this stage, you are still a crypto-curious person. Don’t think of yourself as an expert. Don’t let eye-popping returns during this time (if you are lucky) fool you into thinking that you have mastered the cryptocurrencies. Calm your nerves.
And remember, just like in stocks, even here, you are HODLing for the long term (yes, that’s not a typo for HOLD)
So how will 1% allocation to Bitcoin and other cryptocurrencies work in practice?
Suppose you have Rs 1 crore portfolio. In that, you now invest 1%, i.e. Rs 1 lakh in cryptos while the remaining 99%, i.e. Rs 99 lakh is in a portfolio of equity and debt.
Now if in a short time your crypto increases 10-fold (10X), then your Rs 1 lakh turns into Rs 10 lakh. And your overall portfolio shoots up to Rs 1.10 crore. Good for you.
But what if your cryptos go down to zero? You will still have Rs 99 lakh in core 99% equity & debt portfolio. As we have seen above, a 1% allocation isn’t going to materially harm you. The worst-case scenario of you losing 1% will not derail your financial goal planning or stop you from achieving your financial goals.
But should you just invest this 1% in just Bitcoin or in a basket of other currencies (Altcoins) as well?
My feeling is that the bigger established ones like Bitcoin, etc. are comparatively better bets than chasing the latest coins in news. But who knows, I could be totally wrong.
But let’s assume that you pick 10 cryptos and tokens to sort of diversify your portfolio. Let’s say that the Rs 1 lakh you decide to put in as crypto (as 1% of the portfolio in our earlier example of 1% percentage in crypto), you divide it between Bitcoin 10%. Ether 10%, Cardano 10%, and in seven more coins named A, B, C, D, E, F, and G (10% each). So basically you have a crypto portfolio ratio of 1% and then a further 10% in each crypto token.
Now, this is no doubt a diversification. But a small problem with this approach is that from what I have learned till now (remember I am still a crypto-curious guy and not a crypto-investor), is that most cryptocurrencies have a high correlation and the prices of a majority of them are strongly coupled with the price of Bitcoin. In fact, whenever there is a fall in BTC prices, it is immediately followed by a fall in all other coins (except Stablecoins). And often, then fall in these Alt-coins is much more than the fall in Bitcoin.
So even though you will have 10 coins in your crypto portfolio, it might still end up being just a coin diversification and not exactly actual diversification in the true sense. Inspite of holding 10 crypto assets, your portfolio will behave more or less like what Bitcoin does. So what is the solution? I think it’s better to diversify coins based on their blockchain use-cases. But here is the problem, it’s too technical and might not be something that crypto-curious people like me understand today. So I leave this diversification discussion here itself. Sorry.
Do read about Bitcoin Vs Altcoins and which Altcoin other than Bitcoin to invest in?
And that was just one crypto portfolio example. Many large investors (even crypto billionaires and Bitcoin billionaires) hold hundreds of cryptocurrencies, as they themselves are not sure about which will do well and which will go bad. So they too spread their bets.
So this establishes that having up to 1% in Bitcoins is ok if you are interested. But what if you are one level up from just being a crypto-curious person. I heard a few terms somewhere like crypto-enthusiast and crypto-savvy. If you belong to these (and you better be sure about it), then it’s said that you can have up to 5% in crypto assets in your portfolio. And anything more than 5% I think should be reserved for true experts.
By the way, there is a Yale University study that says that every portfolio should have up to 6% Bitcoin. You can read about it in this short Q&A here. But here is a summary – If you as an investor believe that Bitcoin will perform as well as it has historically, then you should hold 6% of your portfolio in Bitcoin. If you believe that it will do half as well, you should hold 4%. In all other circumstances, if you think it will do much worse, then you should still hold 1%. Of course, one has to remember that, as with any other assets, past performance is not a guarantee of future returns.
There is also a statistical model that many use to decide How Much Crypto Should Be In Your Investment Portfolio? It is called The Black-Litterman Model. Don’t be afraid of the difficult-sounding name. It’s pretty simple and actually interesting to read about. Here is a short summary as per this article (link) – the model starts with a neutral, “equilibrium” portfolio and provides a mathematical formula for increasing your holdings based on your view of the world. What’s amazing is that it incorporates not just your estimate about how an investment might grow, but also your confidence in that estimate, and translates those inputs into a specific portfolio allocation. Here is how it works (look at the image below and then read on)
Select how much you think Bitcoin will overperform stocks, from +5% to +40%. Each return expectation corresponds to a line on the chart. For example, if you think that Bitcoin will outperform stocks by 20%, this corresponds to the purple line. Now, follow the line left or right based on how confident you are. If you’re at least 75% confident (a solid “probably”), the purple lines up with a 4% allocation to Bitcoin. One of the most interesting things to note is how high your return estimate needs to be and how confident you need to be in order to take a sizable position in Bitcoin. For example, for the model to tell you to hold a 10% allocation you need to be highly confident that Bitcoin will outperform stocks by 40% each year. Also of note, it does not take much to drive the model’s allocation to 0% allocation, i.e., no crypto holdings. If you don’t think that there’s a 50/50 chance that Bitcoin will at least slightly outperform, the model says to avoid it entirely.
There is also a long paper on this titled Investing with Cryptocurrencies – evaluating their potential for portfolio allocation strategies on the SSRN site here. But let’s not try to act as experts here. The fact is that we are just curious people and we frankly don’t know much. And Bitcoin is still evolving as an asset and we as investors.
By the way, just like mutual fund SIP, if you eventually decide to get into cryptos and not sure about how and when to invest, it might be a good idea to do a sort of Bitcoin monthly SIP. Atleast you will average out a bit of your entry prices and manage the risk of this wild animal a bit.
Related Reading: Bitcoin Vs Mutual Fund
So that was about how much Bitcoin you should own? Cryptocurrencies and asset allocation are a new frontier as crypto is a new space. It is still to establish itself as an asset class and given the extremely high volatility, many have their doubts (including me occasionally). The Crypto portfolio ratio is still something that investors are figuring out. But let’s see how this pans out in the long term.
I hope you found this article that talks about crypt portfolio strategy in general and particularly about – How much cryptocurrency should I own (2021) and How to Build Your Cryptocurrency Portfolio in 2021 useful.
Important – Nothing of what I wrote above or what is written in articles linked to, should be considered as investment advice. These are just my thoughts about the topic being discussed. Remember that cryptos are extremely risky. Do your own research and then decide accordingly whether to invest or otherwise.