Bitcoin Prices soar in 2024. But before the excitement leads you to a hasty purchase, you may want to err on the side of caution.

Bitcoin and other cryptocurrencies should generally be considered Just a small strip Financial experts say that due to its extreme volatility, investors typically hold no more than 5% of their portfolios.

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

“You won’t have the same size distribution of Bitcoin as you did before Nasdaq or S&P 500 Index” says Ivory Johnson, Washington, D.C.-based certified financial planner and founder of Delancey Wealth Management

“Anytime you have a truly volatile asset class, you need to reduce the amount of it in your portfolio to have the same impact as traditional assets like stocks and bonds,” CNBC member Johnson said. financial advisory committee.

Bitcoin is the largest cryptocurrency best performing investments In 2024, the odds are stacked against it. Prices surged about 125% from the $40,000 range at the beginning of the year to around $94,000 by the end of the year.

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

Prices surged after Donald Trump won the US presidential election. His government is expected to adopt deregulatory policies to stimulate cryptocurrency demand.

Last year, the U.S. 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 it easier for retail investors to buy cryptocurrencies.

But experts warn that high profits may mask potential dangers.

“With high returns comes high risk, and cryptocurrencies are no exception,” said Amy Arnott, portfolio strategist at Morningstar Research Services. wrote June.

Arnott wrote that since September 2015, Bitcoin has been nearly five times more volatile than U.S. stocks, while Ethereum has been nearly 10 times more volatile than U.S. stocks.

“A portfolio weighting of 5% or less seems prudent, and many investors may want to skip cryptocurrencies entirely,” she said.

Bitcoin dropped by 64% and 74% respectively Their values ​​are in 2022 and 2018 respectively.

Mathematically, an investor would need a 100% return to recover from a 50% loss.

Arnott said that so far, cryptocurrency returns have been high enough to offset its additional risk, but this pattern will not necessarily continue.

Arnott writes that there are several reasons for this: As cryptocurrencies have become more mainstream, their value as a portfolio diversification tool has decreased. Its popularity among speculative buyers also “makes it susceptible to pricing bubbles that eventually burst,” she added.

Money management firm BlackRock believes that for investors who are comfortable with the “risk of a potential rapid price collapse” and believe Bitcoin will be more widely adopted, diversified It makes sense to have Bitcoin in your investment portfolio. wrote Early December.

(BlackRock offers Bitcoin ETF, iShares Bitcoin Trust, it will go.)

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BlackRock experts wrote that a 1% to 2% allocation to Bitcoin is a “reasonable range.”

Beyond that range, Bitcoin’s share of total portfolio risk would “increase dramatically,” they said.

For example, BlackRock estimates that a 2% allocation to Bitcoin represents approximately 5% of the risk of a traditional 60/40 portfolio. But it said a 4% allocation would bring that figure to 14% of total portfolio risk.

“From Vanguard’s perspective, cryptocurrencies are more of a speculation than an investment,” said Janel Jackson, former global head of ETF capital markets and broker and index relations at Vanguard. wrote January 2024.

Stock investors own shares of companies that produce goods or services, and many investors receive dividends; bond investors receive periodic interest payments; Commodities are physical assets that satisfy consumer demand, Jackson writes.

“While cryptocurrency has been classified as a commodity, it is an immature asset class with little history, no intrinsic economic value, no cash flows, and can wreak havoc in investment portfolios,” said the firm’s current writes Jackson of Financial Advisory Services Executive. unit.