Navigating crypto is tricky even for seasoned investors – it is volatile, there is a lack of understanding of its purpose, and there is an evolving regulatory stance globally. While apprehensions are valid, today, we explore why they merit inclusion in every balanced portfolio. We focus on its growth narrative, the technology behind it, and the ability to give long-term disproportionate returns.
Naturally, we restrict our arguments to the total crypto market with Bitcoin and Ethereum as its blue-chips. We do not recommend anything beyond these blue-chips to maintain a balanced portfolio.
Invest in technology via crypto
Crypto is fundamentally an implementation of a new technology (blockchain). Blockchain is finding multiple use-cases across industries today including finance, supply chain, and gaming. It will likely be the backbone of Web3 adoption which is touted to be the next big influence in our everyday lives (much like the advent of the internet).
Crypto assets are probably the best way to invest in blockchain technology. Behind its speculative price narrative, Bitcoin and Ethereum are fundamentally blockchains serving various functions.
Institutional adoption is a catalyst for growth
Retail investors have carried the crypto bandwagon for years. The past three years have seen a significant shift in this trend. Financial institutions, including banks, asset management firms, and insurance companies, are acknowledging the potential of digital assets and incorporating them into their business plans.
This institutional involvement will bring stability and credibility to the crypto market. Recently, a report by Goldman Sachs analyzed Ethereum’s deflationary nature (in terms of total supply) and the ability to earn staking rewards on the blockchain. Such reports usually precede a mass influx of capital from institutions.
Investors who include crypto assets in their portfolios position themselves to benefit from this growing institutional interest.
Managing risks while securing rewards
Crypto assets, while known for their volatility, offer a distinct risk-reward profile that sets them apart from traditional investments. Crypto is a higher beta asset compared to stocks – means they can rally much higher during bull markets and decline substantially in bear markets.
So far, Bitcoin remains highly correlated to major financial markets i.e., it reacts to macro situations in the same way a global stock index does. But there is an expectation that it will be eventually decoupled or negatively correlated to stocks much like gold. At that point, it will also be a strong diversification vehicle for most investors to enhance portfolio stability.
Given the above, you can strategically devote a prudent share of capital to crypto by carefully evaluating your risk appetite and financial objectives. This share can vary between 2 and 5% of your investment portfolio.
This allocation strikes a balance between capitalizing on the potential upside of crypto assets while maintaining a cautious approach to risk management. This also ensures exposure to the potential rewards without exposing the entire portfolio to excessive risk.
Long-term potential is robust
The growth and adoption of crypto assets over the past decade have been remarkable. We are still early on the journey towards mass adoption. Crypto’s global accessibility opens up opportunities to diversify portfolios beyond just domestic markets. This is a powerful way to invest in an emerging technology and move along with global investors.
Overall, we believe that the long-term potential of crypto is immense. With 2 to 5% of your portfolio in it, you are ensuring you have an early foot in the door.
The author is CEO, Giottus Crypto Platform