Keep Bitcoin Investment to 2% of Portfolio — Here’s Why

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In the world of investing, cryptocurrency is a particularly divisive topic. Some investors are bullish on crypto, while others steer clear of this relatively new asset class. But in recent years, cryptocurrency, especially Bitcoin, has gained recognition as a legitimate asset.

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Explore why BlackRock, a top-tier global investment company, recently announced its recommendation of keeping some of your portfolio wrapped up in the cryptocurrency.

BlackRock is a well-recognized investment company that manages over $10 trillion in assets. Not surprisingly, when BlackRock makes a statement about building an investment portfolio, many investors take notice. In a recent report, BlackRock indicated its recommendation that interested investors consider allocating up to 2% of their portfolio to Bitcoin.

“We see a case for investors with suitable governance and risk tolerance to include bitcoin in a multi-asset portfolio,” wrote the report authors, a team of four senior executives at BlackRock.

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Although the report was positive about including Bitcoin in your portfolio, it cautioned that the maximum recommended weight sits at 2% of your portfolio. This relatively low percentage indicates that caution is still warranted when dealing with cryptocurrency. “Investors should also be alert to Bitcoin’s risk. It may not ultimately achieve broader adoption. And it remains highly volatile and vulnerable to sharp selloffs,” per the report.

But for folks looking to gain exposure to crypto, allocating up to 2% of your portfolio to Bitcoin could be enough to appreciate the potential rise in crypto’s value.

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Before you add Bitcoin to your portfolio, it’s important to weigh the benefits and risks involved.

As for the benefits, Bitcoin can offer enhanced returns and increased diversification. It’s possible Bitcoin’s value will continue to soar and push your overall returns higher. Plus, adding Bitcoin to your portfolio will increase your diversification across asset classes.

However, there are also risks to Bitcoin. The crypto is volatile, as the report mentioned. Because of that, its price may rise and fall without warning. It’s also possible that Bitcoin will lose value over time, which could negatively impact your portfolio.

While cryptocurrencies, especially Bitcoin, are becoming more widely accepted as an asset, not everyone agrees that Bitcoin deserves a place in your investment portfolio.

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Robert R. Johnson, Ph.D., CFA, CAIA, a professor of finance at Creighton University, recommended keeping your investment portfolio clear of crypto.

“‘Investing’ in Bitcoin and other cryptocurrencies is pure, unadulterated speculation,” Johnson said. “I put investing in [quotes] because this is not investing, it is speculating. There is no way to value cryptocurrencies other than the greater fool theory — the hope that some greater fool will pay you more than you paid. It is the consummate bubble, and investors should stay far away from cryptocurrencies, in general, and Bitcoin specifically.”

Warren Buffett has also expressed skepticism about the cryptocurrency in the past, at one time calling it “probably rat poison squared.”

Ultimately, you must decide for yourself whether or not crypto deserves a place in your investment portfolio. As an asset class, crypto is widely considered high-risk, which may or may not make it appropriate for your portfolio and risk tolerance. For example, if you have a low risk tolerance, then steering clear of Bitcoin makes sense. But for those with a higher risk tolerance and a willingness to see where crypto goes, dedicating a small portion of your portfolio to Bitcoin could make sense.

“It’s important to distinguish between essential and discretionary investments,” R.J. Weiss, CFP, founder of The Ways to Wealth, explained to CNBC. “Bitcoin or other cryptocurrencies should not be the cornerstone of your retirement plan.”

Bitcoin is one of many cryptocurrencies. But it tends to hold more legitimacy among investors than other types of cryptocurrency. Although BlackRock has recommended that interested investors include up to 2% of Bitcoin in their portfolios, that doesn’t necessarily mean you need to follow that guidance. You’ll need to decide for yourself whether or not you want to expose your portfolio to the potential benefits and risks of Bitcoin.

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This article originally appeared on GOBankingRates.com: Asset Manager BlackRock: Keep Bitcoin Investment to 2% of Portfolio — Here’s Why

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