How crypto fits into a diversified investment portfolio
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Some big claims have been made about cryptocurrency in the past, including that it will replace government-issued money, that it will be as groundbreaking as the smartphone, and that it will be as groundbreaking as the smartphone. democratizing the financial system. But most investors point to a fairly mundane reason for holding digital assets: diversifying their investment portfolios.
The bottom line: Financial advisors and market analysts say there’s a right way and a wrong way to use digital assets like Bitcoin for diversification.
Diversification is an important aspect of a solid portfolio, advisors said. It helps reduce high levels of investment risk.
Nearly half (45%) of crypto investors say diversification is the main reason they hold the asset. report It was published this month by the Urban Institute, a think tank.
According to the report, diversification was actually investors’ No. 1 motivator.
According to Urban, which surveyed 3,194 U.S. adults in January, 27 percent of investors said they believed crypto was the future, 11 percent said they would make more money from crypto than other investments, and 5 percent said they did not trust the U.S. dollar. It defines crypto holders as people who report owning cryptocurrency such as bitcoin, solana, ethereum, XRP, stablecoins, memecoins, and other digital currencies.
The findings suggest that investors are looking at cryptocurrency as part of a more traditional investment strategy. nearly twenty years of existenceExperts said investors largely viewed it as countercultural and unconventional.
“As crypto becomes more widely integrated into mainstream financial markets and becomes just another asset, it makes sense for crypto to diverge from the anti-establishment views that led early adopters,” said Dan Cassino, a political science professor at Fairleigh Dickinson University and author ofBitcoin Brothers: Masculinity, Cryptocurrency and the Future of Men”
Overall, it’s a good sign that people are considering cryptocurrency from an investment perspective, said Douglas Boneparth, a certified financial planner and founder and president of Bone Fide Wealth in New York.
“When the primary motivation shifts from ideology or speculation to portfolio construction, that’s a sign of maturity,” said Boneparth, who is also a member of CNBC’s Council of Financial Advisers.
But how effective cryptocurrency can be as a diversifying asset “entirely depends on the quality of implementation,” he said.
‘A good complement’ to traditional investments
There are different ways to diversify an investment portfolio.
For example, investors can diversify across asset classes by owning a mix of stocks, bonds, cash, commodities, and cryptocurrencies, among others. They can also diversify within asset classes, such as holding both U.S. stocks and international stocks.
The basic premise is to have assets that don’t move together but instead move up and down independently of each other, said Veronica Willis, senior investment strategist on the asset allocation team at Wells Fargo Investment Institute.
This way, when stocks fall, investors can count on other asset classes to act as balance.
Bonds are a traditional way to diversify away from stocks. Willis said that over the past 10 years, bonds have shown a low correlation with U.S. stocks, but a correlation of 0.02 with the S&P 500 stock index.
A correlation of 1 means that the assets move together perfectly; This means there is no diversification advantage. Zero correlation means there is no relationship, while negative correlation means they move in opposite directions.
Meanwhile, Willis said digital assets have had a correlation of 0.2 with the S&P 500 over the past decade. That’s higher than bonds, but still “too low,” he said.
“Cryptocurrency tends to be diversifying, so it can be a good complement to more traditional investments over the long term,” said Jim Ferraioli, director of crypto research and strategy at the Schwab Center for Financial Research.
Bitcoin in particular “has its place in a portfolio on a diversification basis,” Boneparth said.
“It has a really different return history than stocks and bonds over the long term,” Boneparth said. “This is a meaningful contribution for investors considering currency depreciation, geopolitical instability, or simply want an asset with different fundamental drivers.”
The benefit of diversification is not ‘unconditional’
Experts said investors turning to cryptocurrency for diversification should be prepared for volatility. They said that during some downturns you may see red in your portfolio.
“The correlation between Bitcoin and stocks tends to rise during periods of acute market stress when investors sell everything liquid,” Boneparth said. “So the benefit of diversification is real but not unconditional.”
Cryptocurrencies tend to move with stocks during broad market sell-offs because digital assets are a “hybrid” between diversified assets and growth assets, Willis said. Growth assets tend to have high potential for investment returns but are also high risk, he said.
While not all crypto types necessarily move in tandem with Bitcoin, it is the primary driver of returns for the asset class as it has the largest market share, he said.
“When investors start to get a little scared and get rid of their risky assets, crypto is included in that,” Willis said.
In short: Don’t rely on crypto as your only diversifier, he said.
Experts also said correlations may change over time. “Assets that once provided great diversification may no longer be so,” Morningstar portfolio strategist Amy Arnott wrote in May 2025. article.
For example, in the 10 years through April 30, 2025, bitcoin and other “major cryptocurrencies” had a correlation of less than 0.4 to stocks, bonds, real estate, gold, commodities and other types of assets, Arnott wrote. However, he wrote that Bitcoin has a correlation of 0.55 when measured against US stocks for the three-year period ending in April 2025; This was higher than the near-zero or even sub-zero correlation numbers in some previous periods.
What is the best crypto allocation?
Your allocation to cryptocurrencies is an important factor, Boneparth said. Many financial advisors say a 1% to 2% investment in digital assets is a good allocation.
“Above 5%, Bitcoin’s volatility may begin to dominate the overall risk profile of the portfolio,” Boneparth said. “At this point it stops working as a diversifier and starts functioning as a primary bet.”
Willis said he recommends a roughly 2 percent to 3 percent allocation to crypto. Even then, he said he largely recommends it only to investors who view growth as an investment goal, as opposed to more conservative investors looking for income, for example.
Small allocations blunt overall risk and the impact of volatility, he said.
“If you’re a long-term investor, we think: [digital assets] “It could add some attractive diversification benefits,” Willis said. “But that doesn’t mean it’s a highly volatile asset.”
