Our golden rule to investing in crypto.
Our golden rule to investing in crypto. How much to invest in crypto is a personal question all investors have to answer. We’ll get straight to our recommendation. We call it our 5% golden rule: At Betterment, we recommend investing 5% or less of your investable assets (your investable cash, stocks, bonds, mutual funds, exchange-traded funds, etc.) in crypto.
Assuming you are a long-term investor, a simple way to think about this is to ask yourself how confident you are that the crypto industry will continue to grow over time. Then decide how much you want to invest into a diversified portfolio based on that, no more than 5% of your investable assets.
Where does the 5% golden rule come from?
Using some math with fancy terms like the Black-Litterman model, our investing experts can calculate our maximum recommended crypto allocation. To get to our recommended allocation, the model takes into consideration our analyst’s answers to two important questions:
- How much, by percent, will crypto outperform stocks per year?
- In terms of probability, how confident are you that crypto will outperform stocks?
Answers to both of the questions above exist on a spectrum, meaning that individuals may have different answers to the two questions. By plugging in the answers to those two questions into the Black-Litterman model, our experts recommend no more than 5% if you have high confidence that crypto will significantly outperform stocks. Many individuals may not be as confident in crypto outperforming stocks. In this case, we would recommend allocating less than 5% to match your comfort level.
Allocation then diversification.
Once you settle on your preferred crypto allocation of 5% or less, remember to consider diversification. All of our Crypto Investing portfolios are designed to offer broad diversification across many crypto assets.
The article you've mentioned highlights Betterment's recommended approach to investing in cryptocurrency, emphasizing the 5% golden rule: allocating 5% or less of your investable assets to crypto. This strategy is rooted in assessing one's confidence in the long-term growth of the crypto industry. Betterment utilizes quantitative models like the Black-Litterman model, integrating expert analyst opinions regarding the potential outperformance of crypto compared to stocks.
Let's break down the key concepts in the article:
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Investable Assets: These include cash, stocks, bonds, mutual funds, ETFs, etc. It's the pool of funds available for investment.
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5% Golden Rule: Betterment suggests limiting crypto investment to 5% or less of one's investable assets. This percentage is derived from a model considering the potential outperformance of crypto compared to stocks.
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Long-Term Investor Perspective: Betterment focuses on catering to long-term investors and encourages them to assess their confidence in the crypto industry's sustained growth over time.
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Black-Litterman Model: This quantitative model helps determine the recommended allocation by incorporating analyst opinions on two critical questions:
- How much, by percentage, will crypto outperform stocks per year?
- In terms of probability, how confident are you that crypto will outperform stocks?
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Customized Allocation: Answers to the above questions can vary among individuals. The model recommends an allocation based on these answers, advising no more than 5% for those highly confident in crypto outperforming stocks.
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Diversification: Once the preferred crypto allocation is determined, Betterment emphasizes the importance of diversification within the crypto assets. Their Crypto Investing portfolios aim to offer broad diversification across multiple crypto assets.
This approach integrates risk management by limiting exposure to a volatile asset class like cryptocurrency while allowing investors to potentially benefit from its growth. It's a calculated strategy that considers individual risk tolerance and market expectations.
