With the resurgence of the price of Bitcoin — partly driven by the January approval of spot Bitcoin exchange-traded funds (ETFs) by the Securities and Exchange Commission (SEC) — there has been renewed interest in the crypto space as of late.
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This has also brought not only institutional legitimacy to the space but easier access to cryptocurrencies, as proven by the numbers. As of April 9, Bitcoin spot ETFs held $56.35 billion in assets under management, according to The Block data.
“Many investors consider allocating to crypto in their retirement or tax advantaged accounts given the historical tendency of crypto assets to provide outsized returns,” said Rayhaneh Sharif-Askary, Grayscale‘s head of product and research. “When making this decision, investors should consider their crypto allocation in the context of their broader investment portfolio, risk appetite and income needs.”
Grayscale is one of the firms which 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 U.S. investors who don’t own Bitcoin would consider investing in the asset via their 401(k), IRA or other retirement plan in 2024.
Now, while experts recommend diversification as a cornerstone of a safe and well-rounded retirement portfolio, advice varies when it comes to including crypto in said portfolios.
So how much crypto should be included in retirement portfolios?
Less Than 5%
Several experts argue that due to their inherent volatility, investors should allocate no more than 5% to crypto.
“The allocation of crypto 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 the portfolio towards crypto assets. For transparency our clients do not own crypto inside their retirement portfolios as we believe we can get a better risk-reward profile out of small cap stocks.”
Grayscale’s Sharif-Askary echoed the above sentiment, saying that research suggests that approximately 5% of a portfolio allocation to crypto may result in the highest risk-adjusted returns on average, albeit with higher portfolio volatility, for investors who would otherwise hold a classic mix of stocks and bonds.
“Crypto is a volatile asset class, so a little goes a long way,” added Sharif-Askary.
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Target 5% to 10%
Although crypto is generally considered a risky asset, Michal Rozanski — co-founder and CEO of Empirica — argued that it still offers one of the highest risk-reward ratios among asset classes.
“Therefore, we recommend allocating 5% to 10% of the retirement portfolio to it, depending on the time to retirement,” said Rozanski. “We expect the volatility of this asset to remain high, but the low correlation of cryptocurrencies with traditional asset classes will enhance diversification in a retirement portfolio.”
Stephen Kates, CFP and principal financial analyst for Annuity.org, agreed with this premise. He said investors should put no more than 5-10% of their portfolio into any specific single investment, and not exceed these thresholds because most cryptocurrencies have a high correlation to one another.
“Correlation is the likelihood of two or more investments moving in the same direction at the same time. This may sound great when the prices are rising but it can be a disaster for your portfolio when the prices fall,” he added.
Depends Entirely on Your Circumstances
Cliff Ambrose — FRC and founder/wealth manager at Apex Wealth — argued that in considering the incorporation of cryptocurrencies into a retirement portfolio, the optimal allocation depends on various factors. These include risk tolerance, investment goals and time horizon.
Yet, while there’s no one-size-fits-all answer, he too said that financial experts often recommend a conservative approach, with crypto 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.
“Therefore, that which is volatile is usually a smaller portion of the portfolio than traditional stable investments like dividend paying stocks and high-quality bonds,” said Vijay Marolia, co-founder of The Cash Square. “Because crypto is so volatile, I would recommend people start small and dollar cost average over time.”
Nothing at All?
On the other end of the spectrum, some experts advise against including cryptos in retirement portfolios whatsoever — saying they are too risky and akin to speculative investments.
“The answer is simple, zero,” said Dr. Robert R. Johnson, professor of finance at the Heider College of Business, Creighton University. “The crypto market has never been a good place to invest. At times it has been a profitable place for some to speculate. My belief is ‘Just Say No!’ should guide your actions with respect to crypto and retirement accounts.”
According to Johnson, investing in Bitcoin and other cryptocurrencies is pure, unadulterated speculation.
“Cryptocurrencies don’t produce anything — a fact that Warren Buffett eloquently explained at the Berkshire Hathaway 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 would be considered for carrying the burden of providing support to a lifestyle over many decades.
As such, Jake Falcon — CEO of Falcon Wealth Advisors — argued that crypto doesn’t belong in a retirement portfolio at all.
“Crypto should only be considered with assets they are willing to lose completely and that are not earmarked for something as important as retirement,” he added.
And as Scott Lieberman, founder of Touchdown Money, further argued, if you’re older and need to protect what you have — because you no longer have the luxury of time to make back what you lose — you’re better off limiting your crypto investment.
“Crypto is a high-risk opportunity, so you’ve got a much higher chance of going to zero than with stocks or mutual funds. If you’re in your 30s, you can handle a loss like that. If you’re in your late 50s, taking that loss can be a disaster,” he said.
Crypto Investments: Which Way?
Nowadays, there are several ways to include crypto in retirement accounts, particularly with spot Bitcoin ETFs opening the door to easier access.
One key factor to take into consideration is to diversify. Don’t put all your eggs into one basket, according to WinCap’s Collins.
“This could mean investing in different cryptocurrencies, such as Bitcoin, Ethereum, and Litecoin, as well as considering other types of assets like stablecoins or decentralized finance (DeFi) tokens,” he suggested.
“It’s also important to keep in mind the volatility of the crypto market and to regularly reassess the portfolio to ensure the allocation is in line with one’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 retirement investors seeking added security and convenience, according to Apex Wealth’s Ambrose.
Ultimately, Ambrose indicated, the decision on the allocation and type of crypto assets in a retirement portfolio should align with an individual’s risk tolerance, investment objectives and overall financial strategy.
Seeking guidance from a financial advisor who understands both traditional retirement planning and the nuances of cryptocurrency investing can help investors navigate this evolving landscape effectively, he concluded.
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This article originally appeared on GOBankingRates.com: How Much Crypto Should Be a Part of Your Retirement Portfolio?
