How much cryptocurrency should be in your wallet – Forbes Advisor INDIA

Adding Bitcoin to your investment portfolio can have a positive effect on your long-term returns, but it’s all about timing.

A report from the CFA Institute Research Foundation examined the impact of Bitcoin on a diversified portfolio between January 2014 and September 2020. During this period, a quarterly reallocation of 2.5% to Bitcoin improved the return of a traditional portfolio by nearly 24%.

That’s a huge impact from a small allocation. This is not surprising: Bitcoin is up about 2.875% over the period.

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Be very careful with findings like these, which make it seem like the more crypto you buy the better. This really only applies to early adopters – for example, if you had added the same amount of crypto in December 2020, the impact would have been about zero until July 2022.

You can get too much of something new, and that’s especially true with cryptocurrency. Let’s see how much crypto you should have in your wallet.

How much crypto should you own?

Most experts agree that cryptocurrencies should not make up more than 5% of your portfolio.

This amount is “small enough to keep an investor comfortable during periods of high volatility, but also large enough to have a really positive impact on the portfolio as crypto prices rise,” said Bruno Ramos de Sousa, head of global expansion at Hashdex.

Some experts, such as Aaron Samsonoff, chief strategy officer and co-founder of InvestDEFY, allow allocations of up to 20%. But how much crypto should ultimately be in your wallet ultimately depends on your risk tolerance and beliefs about crypto.

In addition to excessive long-term returns, cryptocurrencies often have excessive volatility.

In the case of the CFA Institute study, the larger the allocation to Bitcoin, the higher the returns and the greater the volatility. Between January 2014 and September 2020, the traditional portfolio without Bitcoin generated a return of 6.26% compared to the traditional portfolio with an allocation of 2.5% to Bitcoin, yielding an annual return of 8.6%, which is also a increased volatility.

“The potential for outrageous returns coupled with the significant risks of this emerging asset class means that a very small allocation will suffice,” said Ric Edelman, founder of the Digital Assets Council of Financial Professionals and author of “The Truth About Crypto.”

Experts say that a small amount can dramatically improve your overall returns without putting you at risk of financial loss if your cryptocurrency investment drops significantly or even drops to zero.

“Adding some to your portfolio can be a great way to make real profits in the long run, knowing that if you don’t go big, your entire investment portfolio won’t run out,” said Callie Stillman, partner at Ascenseur Financier.

What should my crypto wallet look like?

Once you have decided how much cryptocurrency you want to own, the question becomes which crypto assets to buy and how much to keep.

Edelman proposes four crypto wallet options. First, you can only own Bitcoin. It is the oldest and largest digital asset in the dominance of the crypto market.

“When institutions invest, they usually only buy Bitcoin. It may not bring the highest profit, but it will be the last to drop to zero,” he says.

As Bitcoin’s market dominance fades, it becomes increasingly important to diversify your position to take advantage of the full range of crypto opportunities, said Martin Leinweber, digital asset product strategist at MarketVector Indexes.

“Different assets notably offer different return patterns and react heterogeneously to Bitcoin withdrawals,” Leinweber says. “While the correlations can be high in the short term, in the longer term Bitcoin is nothing more than a gaming token like Axie Infinity or an exchange token like Binance Coin (BNB).”

A popular alternative to Bitcoin is Ethereum, the second largest cryptocurrency by market capitalization, with a market dominance of 18%. “Many believe it has a much greater benefit to global trade and will therefore continue to grow in importance,” Edelman said. Many other coins and tokens are also based on the Ethereum blockchain.

You can also have a wallet with a mix of Bitcoin and Ethereum. “They are the Coke and Pepsi of crypto,” says Edelman. Together you own more than 60% of the crypto market share.

Edelman proposes a split of 50-50 or 60-40 in favor of your favorite piece. “Otherwise you’re making a big gamble”, and “we should avoid betting because this asset class is already very risky”.

While larger coins like Bitcoin and Ethereum can make up a larger portion of your portfolio, holding smaller portions of other crypto assets can improve your long-term returns, Leinweber says.

Explore crypto ETFs

Owning crypto directly is no longer your only option for investing in the space. There are several Bitcoin ETFs and blockchain ETFs that provide an easy way to get crypto exposure into your wallet.

Edelman points to the Bitwise 10 Crypto Index Fund (BITW), a market cap-weighted ETF of the 10 largest digital assets. Being weighted by market cap means Bitcoin and Ethereum make up the bulk of the fund with over 90% of the total portfolio.

“Most passive crypto investors would be better off focusing on Bitcoin, Ethereum, and/or a crypto index fund,” says Samsonoff. “Blockchains and single-name projects, even the largest, still have a lot of tail risk, and on a risk-adjusted basis, it’s hard to beat Bitcoin, Ethereum, or any index unless you’re an active researcher in the space.”

Leinweber proposes a multi-token fund that replicates a market cap-weighted index to ensure you get the returns from the crypto market.

“You implicitly buy the winners and sell the losers,” he says, as the asset manager does the work for you and replicates the index.

Some crypto ETFs invest in publicly traded companies active in the crypto industry, such as crypto exchange Coinbase, crypto bank Silvergate Bank, and Bitcoin mining company Riot Blockchain, rather than buying cryptocurrencies directly.

Investment firms also offer separately managed accounts (SMA), which are similar to custom mutual funds that hold up to two dozen different cryptocurrencies.

“The account is managed just for you, with a truly personalized approach to rebalancing and harvesting tax losses you can’t do with money,” says Edelman. The challenge for SMAs is that they usually have a minimum investment of INR 1,000.

The composition of a good crypto wallet

Stillman says your crypto wallet should look like any other part of your investment portfolio. It should be diversified and match your risk tolerance.

You should use cryptocurrencies that you have researched and feel comfortable investing in. “Read white papers about them to better understand how they work and what they’re for,” she says. “Find out who is behind them and know their background.”

An important question is why you buy crypto and what your plans are. Are you buying because your friends said so? Is it for short or long term profit? What do you plan to do with the profits you earn? “Some cryptos are liquid, others are not,” notes Stillman. “How important is that to you?

With a good crypto wallet, you can keep it through bear and bull markets without sleeping at night. “If the crypto portion of your portfolio is too large or concentrated in speculative altcoins, you risk getting paper hands,” says Samsonoff.

“Conversely, if you’re underperforming, you risk getting greedy when the confirmation bias kicks in after the crypto rally, and you may be able to buy a top after you sidelined to move up,” he said.

Keeping a long-term perspective, i.e. years and decades, is key to managing your crypto portfolio. “It’s a new asset class, so it’s very volatile, and you need to focus on the earnings potential over decades, not weeks or months,” Edelman says.

Leinweber says portfolios are generally profitable over a period of four years or more. “It’s an investment in new technology, not a get-rich-quick scheme.”

Many experts recommend using an average rupee cost strategy where you buy or sell a fixed amount of rupees no matter what. This can take emotion out of the equation.

Trying to time the market perfectly or checking your portfolio every day generally leads to more stress and poor decisions. Instead, it’s better to have periodic reassessments of your positions and rebalancing based on your changing view of the market, not much different than an equity portfolio,” says de Sousa.

Otherwise, your cryptocurrency allocation can overwhelm your portfolio and increase your overall risk.

“If you are not an active trader, you should have a consistent percentage allocation to crypto and rebalance your target weights monthly or quarterly,” said Greg King, founder and CEO of Osprey Funds.

Keeping track of your crypto wallet can be a challenge.

The most important tip when tracking your crypto portfolio is to align the timeline of your dissertation, says Samsonoff. Know your entry and exit trigger before you begin.

“Without a clear plan, your belief – or lack thereof – will be tested and succumb to emotional decisions based on the volatility of the crypto space,” he says.

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