Schwab Warns Crypto Allocations Can Boost Portfolio Volatility

The largest publicly traded U.S. brokerage, Charles Schwab, has weighed in on crypto allocations. According to its recent white paper, there is no fixed correct way to allocate crypto in a portfolio. The firm's position is that the right allocation depends on each investor's goals, risk tolerance, and return expectations.

The report outlines two main approaches: a return-based approach and a risk budgeting approach. Under the first method, if an investor assumes Bitcoin will return 15% per year, a conservative portfolio might hold around 1% while an aggressive one could hold up to 8.8%. Ethereum's suggested allocations are smaller across all risk profiles due to its higher volatility.

Schwab noted that if expected annual returns for either Bitcoin or Ethereum fall below 10%, neither asset may justify any allocation at all, even for investors with a high tolerance for risk. The firm pointed out that Bitcoin's annualized historical volatility is around 72% and peak drawdowns have exceeded 70%. Ethereum has shown even wider swings, with close to 98% annualized volatility and drawdowns approaching 88%.

The second approach focuses on allocating a certain amount of risk to crypto. Under this framework, allocating around 1.2% to Bitcoin or 0.9% to Ethereum in a conservative portfolio accounts for roughly 10% of that portfolio's total risk. In moderate to aggressive portfolios, reaching a similar risk contribution requires Bitcoin allocations of 2.8% to 4% and Ethereum allocations of 2% to 2.9%. Schwab said cryptocurrencies can offer some diversification within a portfolio already spread across stocks, bonds, and cash.