Bitcoin has soared in 2024. How much (if any) should you own?

Bitcoin prices have increased dramatically in 2024. But you may want to be careful before the euphoria sends you into a hasty buying frenzy.

Bitcoin and other cryptocurrencies should generally only make up a small portion of investors’ portfolios — typically no more than 5% — because of their extreme volatility, financial experts say.

Some investors might be wise to stay away from it altogether, they said.

“You don’t get the same size in bitcoin that you would have Nasdaq or the S&P500” says Ivory Johnson, a certified financial planner and founder of Delancey Wealth Management, based in Washington, DC

“Anytime you have a really volatile asset class, you need less of it in the portfolio to have the same impact” as traditional assets like stocks and bonds, said Johnson, a member of the CNBC Financial Advisor Council.

Bitcoin, the largest cryptocurrency, was by far the best-performing investment of 2024. Prices rose about 125% to end the year around $94,000 after starting in the $40,000 range.

By comparison, the S&P 500, a US stock index, rose 23%. The Nasdaq, a tech-heavy stock index, grew 29%.

Prices shot up after Donald Trump’s victory in the US presidential elections. His government is expected to embrace deregulation policies that will boost demand for crypto coins.

Last year, the Securities and Exchange Commission also approved — for the first time — exchange-traded funds that invest directly in bitcoin and ether, the second-largest cryptocurrency, making crypto easier to buy for retail investors.

But experts warned that lofty profits could mask an underlying danger.

“High returns come with high risks, and crypto is no exception,” said Amy Arnott, portfolio strategist at Morningstar Research Services. wrote in June.

Bitcoin has been nearly five times as volatile as U.S. stocks since September 2015, and ether has been nearly 10 times as volatile, Arnott wrote.

“A portfolio weighting of 5% or less seems sensible, and many investors may want to skip cryptocurrency altogether,” she said.

Bitcoin lost 64% and 74% of its value in 2022 and 2018 respectively.

Mathematically, investors need a 100% return to recover from a 50% loss.

So far, cryptocurrency returns have been high enough to offset the extra risk — but it’s not a given that this pattern will continue, Arnott said.

There are a few reasons for this: Crypto has become less valuable as a portfolio diversifier as it has become more mainstream, Arnott wrote. Its popularity among speculative buyers “also makes it susceptible to price bubbles that will eventually burst,” she added.

BlackRock, a money manager, thinks there’s a case for owning bitcoin in a diversified portfolio, for investors who are comfortable with the “risk of possible rapid price declines” and who believe it will become more widely adopted, they say experts from the BlackRock Investment Institute. wrote early December.

(BlackRock offers a bitcoin ETF, the iShares Bitcoin Trust, IBIT.)

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A 1% to 2% allocation to bitcoin is a “reasonable range,” BlackRock experts wrote.

Going further would “greatly increase” bitcoin’s share of a portfolio’s overall risk, they said.

For example, a 2% bitcoin allocation represents about 5% of the risk of a traditional 60/40 portfolio, BlackRock estimates. But a 4% allocation increases that figure to 14% of total portfolio risk, the report said.

By comparison, Vanguard, another asset manager, currently has no plans to launch a crypto ETF or offer one on its brokerage platform, officials said.

“According to Vanguard, crypto is more of a speculation than an investment,” said Janel Jackson, Vanguard’s former global head of ETF Capital Markets and Broker & Index Relations, wrote in January 2024.

Stock investors own shares of companies that produce goods or services, and many investors receive dividends; bond investors receive regular interest payments; and commodities are real assets that meet consumption needs, Jackson wrote.

“Although crypto is classified as a commodity, it is an immature asset class that has little history, no inherent economic value, no cash flow, and can create chaos within a portfolio,” wrote Jackson, now an executive at the firm’s Financial Advisor Services . unit.

Ultimately, one’s overall crypto allocation is a function of an investor’s willingness and ability to take on risk, financial advisors say.

‘Younger, more aggressive investors could invest more [crypto] to their portfolios,” said Douglas Boneparth, a CFP based in New York and member of CNBC’s Advisor Council.

Investors generally keep about 5% of their classic 80/20 or 60/40 portfolio in crypto, says Boneparth, president and founder of Bone Fide Wealth.

“I think it could be a good idea to have some exposure to Bitcoin in your portfolio, but it’s not for everyone and it will remain volatile,” Boneparth said. “As for other cryptocurrencies, it is difficult to determine which ones will be a good long-term investment. That doesn’t mean there won’t be winners.”

Investors looking to buy crypto should consider using a dollar-cost averaging strategy, says Delancey Wealth Management’s Johnson.

“I’ll buy 1% at a time until I reach my target risk,” Johnson said. “And that way I’m not putting in 3%, 4%, 5% all at once and then something happens where it suddenly drops.”

It would also be wise for investors interested in crypto to buy and hold it for the long term, as they would with other financial assets, Johnson said.

Morningstar suggests holding cryptocurrency for at least 10 years, Arnott wrote.