Bitcoin took off in 2024. How much – if any – should you own?

Bitcoin prices soared in 2024. But you can be careful before the euphoria leads you to make hasty purchases.

Bitcoin and other cryptos are usually worth considering just a piece of investors’ portfolios – typically no more than 5% – due to its extreme volatility, according to financial experts.

Some investors may be wise to stay away from it altogether, they say.

“You will not have the same size distribution of bitcoins as you have Nasdaq or S&P 500” said Ivory Johnson, a certified financial planner and founder of Washington, D.C.-based Delancey Wealth Management.

“Anytime you have a real volatile asset class, you need less of it in the portfolio to have the same effect” as traditional assets like stocks and bonds, Johnson told CNBC Board of Financial Adviser.

Bitcoin, the largest cryptocurrency, was the most effective investment 2024, far from it. Prices rose about 125%, ending the year around $94,000 after starting in the $40,000 range.

By comparison, the US stock index S&P 500, up 23%. The Nasdaq, a technology stock index, rose 29%.

Prices jumped after Donald Trump’s victory in the US presidential election. His administration is expected to enact deregulation policies that will spur demand for crypto.

Last year, the Securities and Exchange Commission also – for the first time – approved exchange funds what invest directly in bitcoins and ether, the second largest cryptocurrency, making it easier for retail investors to buy crypto.

But experts warn that big profits can hide dangers.

“With high returns comes high risk, and crypto is no exception,” Amy Arnott, portfolio strategist at Morningstar Research Services wrote in June.

Since September 2015, bitcoin has been nearly five times more volatile than US stocks, and ether has been nearly 10 times more volatile, Arnott writes.

“A portfolio weight of 5% or less seems reasonable, and many investors may want to avoid cryptocurrency altogether,” she said.

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

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

So far, crypto’s returns have been high enough to offset its added risk — but it’s not a given that the model will continue, Arnott said.

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

BlackRock, the money manager, believes there is a case for owning bitcoin in a diversified portfolio for investors who are comfortable with “the risk of a potentially rapid price drop” and who believe it will become more widely adopted, experts at the BlackRock Investment Institute wrote in early December.

(BlackRock offers a bitcoin ETF, the iShares Bitcoin Trust, It will go.)

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Bitcoin’s 1% to 2% distribution is a “reasonable range,” BlackRock experts write.

They said going beyond would “drastically increase” bitcoin’s share of the portfolio’s overall risk.

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

“In Vanguard’s view, crypto is more of a speculation than an investment,” Janelle Jackson, Vanguard’s former global head of ETF capital markets and broker and index relations, wrote in January 2024.

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

“Although crypto has been classified as a commodity, it is an immature asset class with little history, no intrinsic economic value, no cash flow, and the potential to wreak havoc on a portfolio,” wrote Jackson, now head of the firm’s financial advisory division. unit.