The first cryptocurrency exchange-traded funds were approved just over a year ago and the growth in the investment vehicles has been spectacular. The Stock Analysis website lists 92 crypto ETFs that are currently active and the total investment in those funds is now over $140 billion.
The rise of crypto ETFs has put the asset class within reach of everyday investors and many, especially younger investors, say they already own crypto or are thinking about adding it to their portfolios as they move away from the stock-and-bond mentality that older generations embrace.
Crypto can have a place in your portfolio, three veteran fund managers told an audience at the Morningstar Investor Conference in Chicago last week. But there are caveats and there is a limit to how much you should invest.
“For most investors, yes, crypto can fit into their portfolios,” said Juan Leon, senior investment strategist at Bitwise, an asset manager with more than two dozen crypto investment products. “Crypto is a growing asset and it offers diversity. But stay away from the ‘meme’ coins — they’re just similar to a casino.”
Ask before you leap
Before jumping into crypto investors should should ask themselves or their financial advisors several questions, said Erin Garrett, a vice president and portfolio manager at T. Rowe Price whose multiasset fund invests in crypto.
“Whether you should get into crypto really depends on who you are — your risk tolerance, your time horizon and the overall needs of your portfolio,” Garrett said. “There is a lot of curiosity out there on the part of investors, but also a lot of skepticism. If you don’t understand the asset, you should not invest in it or put your clients into it.”
If you do invest in the crypto realm, it’s best to stick with bitcoin, all three experts said.
“Bitcoin is the oldest and largest of the cryptos and it has carved out ownership of the class,” said Robert Mitchnick, managing director and head of digital assets at BlackRock. “The rest of the crypto universe is mostly tied to the price of bitcoin anyway, so investing in anything else isn’t really diversification. Bitcoin is 70% of the market. It’s an emerging global monetary instrument. The rest of crypto is just like early stage venture capital.”
Investing in crypto also means accepting an outsize degree of volatility, Leon said. Although as the asset class matures that volatility will decrease over time, you are still looking at swings today that can be as much as 40%, he said.
For that reason, Leon recommends investors hold their crypto allocation to just 1% to 5% of their overall portfolio, with 3% being the number where maximizing portfolio returns and minimizing volatility are balanced. Investors will need to occasionally rebalance their portfolios to make sure they do not drift from that allocation, he said.
Creating space for cryptocurrency
Mitchnick suggested four strategies for making a first-time allocation to crypto:
- You could make a pro rata sale of 1% to 5% of each of your investments to fund your crypto buy
- If you have alternative investments in your portfolio already, such as real estate or private equity, you can sell a portion of those assets
- You could fund your crypto purchase from the sale of equity stocks
- You could replace some or all of the gold in your portfolio, assuming you hold gold
“Crypto is more volatile than gold. There is more upside and downside risk. But its correlation to the S&P 500 is close to zero, and that is like gold,” he said.
You don’t just have to buy a bitcoin or ethereum fund. There are a growing number of choices.
“You can take an index approach and not have to bet on any one crypto and can capture the winners over time. There are more ETFs offering buffered or covered call strategies. The space is really opening up,” Leon said.
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