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How Does Cryptocurrency Fit Into A Portfolio?

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Most investors know that their portfolio should be diversified. It’s best to hold assets in different risk categories so that if one area gets hit hard by an economic downturn or industry failure, a person’s whole portfolio is not drastically affected. In the past, most of the assets that made up a portfolio included stocks or bonds. With the increasing popularity of cryptocurrencies like Bitcoin, that type of portfolio mixture may be outdated. Many high net worth investors are now wondering if they should be allocating a portion of their portfolio into cryptocurrencies.

Considering Currencies

The first aspect that needs to be looked at is the definition of a cryptocurrency. These instruments are unlike typical currencies such as the pound or dollar. They do not fit into that category. While a person is able to purchase goods or services with a cryptocurrency, their volatility removes them from being defined as a regular type of currency.

Volatility

Cryptocurrencies can be extremely volatile. A 20 percent move in one day is typical. These digital assets also respond to information or news in a manner that is different than regular currencies. You won’t see huge spikes in currency-based ETFs, and they have been around ever since ETFs became available for investors.

Comparison To Commodities

When comparing asset types, an investor must look at commodities as well. Gold and Bitcoin do have some similarities. In the past, gold has been known as a refuge for investors who are seeking some type of safety. Bitcoin has seen this same type of action when some types of news events appear. Gold, and even oil, do make movements that are more volatile than currencies. However, these commodities still did not reach the level of volatility that cryptocurrencies can make. It’s probably best to consider cryptocurrencies as highly speculative and place them in that asset basket.

High Speculation

Cryptocurrencies have only been around for a few years. Other asset classes like gold have been used for trading and investing for thousands of years. If a person is considering cryptocurrencies for their portfolio, they should only place it in the portion that’s allocated for highly speculative assets. The risk is still extremely high and unknown in the cryptocurrency sector. It may take a number of years to fully understand the impact of blockchain technology and how these digital assets will affect the world.

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