'A little goes a long way'

Catherine Dowling has an analogy that might be helpful for investors who are considering buying a cryptocurrency like Bitcoin and wondering what the right amount is.

It's “like hot pepper,” said Dowling, general counsel and chief compliance officer at Bitwise Asset Management, a cryptocurrency fund manager. “A little goes a long way” in a portfolio, she explained earlier this month at Financial Advisor magazine's annual Investing in Women conference in West Palm Beach, Florida.

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Ivory Johnson, a certified financial planner and member of the Board of Financial Advisors, told CNBC that description is apt.

“The more volatile an asset class is, the less you need,” said Johnson, who founded Washington-based Delancey Wealth Management.

Johnson said cryptocurrencies are digital assets, a category that should be considered an “alternative investment.”

Other types of alternatives may include private equity, hedge funds, and venture capital, for example. Financial advisors generally consider them separate from traditional portfolio holdings such as stocks, bonds and cash.

Johnson said that allocating 2% or 3% of an investment portfolio to cryptocurrencies is “more than enough.”

Let's say an asset grows by 50% this year, and the investor holds a 1% position; This is like having a 5% position in another asset that grew 10%, Johnson said.

Whether investors buy cryptocurrencies — and how much they hold — will depend on their risk tolerance and ability, Johnson said.

For example, long-term investors in their mid-20s can take on more risk because they have more time to make up for losses. Such a person may be able to sustain significant financial losses and may reasonably keep 5% to 7% of his portfolio in cryptocurrencies, he added.

However, Johnson said this allocation would likely not be appropriate for a 70-year-old investor who cannot afford to expose his nest egg to significant losses.

“Bitcoin and other cryptocurrencies are a highly speculative investment that involves a high degree of risk,” investment strategists at Wells Fargo Advisors wrote in a note last year. “Investors must have the financial capacity, experience, expertise, and willingness to bear the investment risk and possible complete loss of their investment.”

Cryptocurrency prices have been on a wild ride lately.

BitcoinFor example, it rose to an all-time high earlier in March. It topped $73,000 at its peak, though it has since retreated to less than $69,000.

Bitcoin prices have collapsed ahead of 2022; The digital asset lost about 64% in 2022 to less than $20,000. By comparison, the S&P 500 lost 19.4%.

Since then, prices have quadrupled from their lowest level in November 2022, as of late Wednesday. It will rise more than 50% in 2024, while the S&P 500 is up about 9%.

Bitcoin is about eight times more volatile than the S&P 500, Johnson wrote in a December 2022 Financial Planning Journal article, citing data from the Digital Assets Council for Financial Professionals.

The Cryptocurrency Volatility Index was about six times higher than the Cryptocurrency Volatility Index CBOE Volatility Index As of Wednesday.

“It's still an incredibly volatile asset,” Dowling said. “It's not for everyone,” she added.

Investing in cryptocurrencies has become easier for many investors after the Securities and Exchange Commission approved a slew of bitcoin exchange-traded funds in January, a first for the cryptocurrency industry.

Johnson said investors may want to consider dollar cost averaging in cryptocurrencies. This entails buying a little at a time, until the target allotment is reached. Investors should also rebalance periodically to ensure that large crypto gains or losses do not adjust their target allocation over time, he said.