Crypto Diversification: Experts Warn Against Overreliance
Investors are increasingly turning to cryptocurrency as a way to diversify their portfolios, but experts warn that there's a right and wrong way to use digital assets for this purpose.
A recent report by the Urban Institute found that nearly half of crypto investors (45%) say diversification is the primary reason they hold the asset. This marks a shift from earlier days when crypto was seen as countercultural and nonconformist.
Diversification is an important aspect of a sound portfolio, said experts. It helps reduce investment risk by having assets that don't move in tandem with each other.
Experts recommend a small allocation to cryptocurrency, around 1-2% for most investors. They also caution against relying too heavily on crypto as the sole diversifier, as correlations can change over time and during periods of market stress.
Crypto tends to move with stocks during broad market sell-offs, making it more like a growth asset than a pure diversifier, said experts. However, when used in small quantities, digital assets can provide attractive diversification benefits for long-term investors.