If you’re a Bitcoin fan, you’ll enjoy this article. We’ll discuss how to allocate Bitcoins and other cryptocurrencies and tokens in a portfolio.
As a result, we’ll be able to answer inquiries like –
How much of your portfolio should you put into Bitcoins?
What proportion of one’s cryptocurrency portfolio should be Bitcoin?
What percentage of your portfolio should include Bitcoin?
What percentages should different currencies and tokens have in a crypto portfolio?
What percentage of my crypto portfolio should I invest in?
How many cryptocurrencies should you retain in your portfolio for the long term?
What percentage of the portfolio should be Bitcoin?
What proportion of one’s cryptocurrency portfolio should be Bitcoin?
Before I continue, a word of caution: You should not invest in any cryptocurrency if you are still not properly managing important financial matters such as having an emergency fund, paying off loans on time, paying off credit cards in full each time, investing for financial goals, adequately funding your retirement plan, and so on. You don’t have to invest in crypto just because it’s the new buzzword and everyone around you is talking about it. People were able to manage their finances successfully even before the advent of cryptos in 2009.
What percentage of your portfolio should be allocated to Bitcoins?
Here’s how I imagine one might go about doing it.
I’d recommend starting with a few thousand rupees. Only invest in something you don’t mind losing.
However, simply throwing money into it will not suffice. If you want to raise your crypto allocation in your portfolio in the future, you’ll need to learn a lot about these coins and blockchains.
Three episodes of Patrick O’Shaughnessy’s Hash Power podcast are recommended listening (Episodes 1, 2, and 3).
You can boost your allocation to 1% of your portfolio once you’ve learned more about it. You’re still a crypto-curious individual at this point. Don’t consider yourself an expert. Don’t be fooled by eye-popping gains (if you’re lucky) during this period into thinking you’ve mastered cryptocurrency. Relax and take a deep breath.
And remember, just like in stocks, you’re HODLing (that’s not a typo for HOLD) for the long haul.
So, in actuality, how will a 1% allocation to Bitcoin and other cryptocurrencies work?
Assume you have a portfolio of Rs 1 crore. You now invest 1%, or Rs 1 lakh, in cryptos, while the remaining 99 percent, or Rs 99 lakh, is invested in an equities and debt portfolio.
Now, if your crypto appreciates 10-fold (10X) in a short period of time, your Rs 1 lakh becomes Rs 10 lakh. Your total portfolio now stands at Rs 1.10 crore. That’s fantastic.
But what if your cryptocurrency value plummets to zero? Your core 99 percent equity and debt portfolio will still be worth Rs 99 lakh. As we’ve shown, a 1% allocation isn’t going to hurt you too much. Even if you lose 1%, it will not derail your financial goal planning or prevent you from attaining your financial objectives.
Should you invest this 1% in Bitcoin alone or in a basket of other currencies (Altcoins) as well?
My impression is that the more established ones, such as Bitcoin, are a better bet than chasing the newest coins in the news. But who knows, maybe I’m completely incorrect.
But let’s say you decide to invest in ten different cryptos and tokens to diversify your portfolio. Let’s imagine you decide to invest Rs 1 lakh in crypto (as 1 percent of your portfolio in our previous example of 1 percent in crypto), and you split it between Bitcoin and Ethereum. 10% in Ether, 10% in Cardano, and 10% in each of the other seven coins (A, B, C, D, E, F, and G) (10 percent each). So, you have a 1% crypto portfolio ratio and a further 10% in each crypto token.
This is, without a doubt, a diversification. However, there is a minor flaw in this strategy: based on what I’ve learned so far (remember, I’m still a crypto-curious man, not a crypto-investor), most cryptocurrencies have a high correlation, and the values of the vast majority of them are tightly linked to the price of Bitcoin. In fact, anytime the price of BTC falls, it is immediately followed by a drop in the price of all other cryptocurrencies (except Stablecoins). And, in many cases, the decline in these alt-coins is far greater than the decline in Bitcoin.
So, even if you have ten coins in your crypto portfolio, it may still be coin diversification rather than true diversification. Even if you have ten crypto assets in your portfolio, your portfolio will react similarly to Bitcoin. So, what’s the answer? I believe it is more beneficial to diversify cryptocurrencies based on their blockchain applications. But there’s a problem: it’s extremely technical, and crypto-curious folks like me would not comprehend it today. As a result, I’m going to end this diversity discussion right here. Sorry for the inconvenience.
That was just one example of a crypto portfolio. Many wealthy investors (including crypto and Bitcoin billionaires) store hundreds of cryptocurrencies since they are unsure which will perform well and which will not. As a result, they, too, have spread their bets.
As a result, if you’re interested, possessing up to 1% in Bitcoins is acceptable. But what if you’re a crypto-curious person who wants to learn more? I heard terminology like crypto-enthusiast and crypto-savvy someplace. If you fall into one of these categories (and you should be), your crypto assets portfolio can contain up to 5% of your total assets. Anything over 5% should, in my opinion, be kept for actual specialists.
By the way, according to Yale University research, every portfolio should include up to 6% Bitcoin. You may learn more about it in our quick Q&A. But, in summation, if you feel Bitcoin will continue to perform as well as it has in the past, you should allocate 6% of your portfolio to Bitcoin. You should hold 4% if you anticipate it will perform half as well. If you think it will do significantly worse in all other conditions, you should still hold 1 percent. Of course, like with any other asset, previous performance does not guarantee future results.
Many people utilize a statistical model to determine how much cryptocurrency should be in their investment portfolio. The Black-Litterman Model is what it’s named. Don’t be put off by the name’s complexity. It’s a simple concept that’s actually entertaining to read about. Here’s a quick rundown from this article (link): Starting with a neutral, “equilibrium” portfolio, the model presents a mathematical formula for growing your holdings based on your worldview. What’s remarkable is that it takes into account not only your prediction of how an investment will do in the future, but also your confidence in that prediction, and then converts those inputs into a precise portfolio allocation. This is how it goes: (look at the image below and then read on)
Choose how much you believe Bitcoin will outperform stocks, ranging from 5% to 40%. A line on the chart corresponds to each return expectation. For example, the purple line corresponds to your prediction that Bitcoin will outperform stocks by 20%. Now, depending on your level of confidence, follow the line to the left or right. The purple line corresponds to a 4% allocation to Bitcoin if you’re at least 75% certain (a strong “probably”). One of the most intriguing aspects to consider is how high your return estimate must be and how sure you must be in order to establish a significant stake in Bitcoin. For the model to urge you to keep a 10% allocation in Bitcoin, you must have a high level of confidence that Bitcoin will outperform stocks by 40% each year. It’s also worth noting that it doesn’t take much to drive the model’s allocation to 0%, i.e. no crypto holdings. If you don’t believe there’s a 50/50 possibility that Bitcoin will outperform, the model advises you to stay away from it totally.
On the SSRN site, there is a substantial paper titled Investing with Cryptocurrencies – Evaluating Their Potential for Portfolio Allocation Strategies. But let’s not pretend to be experts. The truth is that we are simply curious folks who, to be honest, don’t know much. And, as an asset, Bitcoin is still evolving, as are we as investors.
By the way, similar to mutual fund SIPs, if you finally decide to enter into cryptos but aren’t sure how or when to invest, a Bitcoin monthly SIP would be a decent idea. At the very least, you’ll be able to average out your entry prices and control the danger of this wild animal.
So that’s how much Bitcoin you should possess, right? As crypto is a new space, cryptocurrencies and asset allocation are a new frontier. It is still establishing itself as an asset class, and given its extraordinary volatility, many people are skeptical (including me occasionally). Investors are still working out how to calculate the Crypto portfolio ratio. But we’ll have to wait and watch how this plays out in the long run.
I hope you found this post about bitcoin portfolio strategy in general, and specifically concerning – How many cryptocurrencies should I possess in 2021 and How to Build Your Cryptocurrency Portfolio in 2021 – helpful.