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Beginner's Guide to Cryptocurrency Portfolio Allocation

profileJoel Koh

Back in June/July 2021, we collaborated with Gemini and CoinMarketCap to survey 4,348 people to delve deeper into what crypto holders and non-crypto holders in Singapore think about cryptocurrencies.

Using these data, we produced the State of Crypto in Singapore Report, a report packed full of valuable insights about people’s perception of cryptocurrency in Singapore.

Interestingly enough, 34% of the non-crypto holders plan to purchase their first cryptocurrency within the next 12 months.

If you fall into that profile and are looking to invest in cryptocurrencies, read on to find out how much of your investment portfolio should be allocated to it.


TL;DR: How Much Cryptocurrency Should You Have in Your Portfolio?

  • Historically, there has been a low correlation between cryptocurrencies like Bitcoin and traditional assets like stocks and bonds.¬†
  • As investing in cryptocurrencies is a risky endeavour, you should not be investing more than you are willing to lose.
  • Based on your risk tolerance you should look at allocating about 1% to 5% of your investment portfolio to cryptocurrencies.
  • You should also consider regularly rebalancing your investment portfolio to avoid concentration risk.

Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Seedly does not recommend that any cryptocurrency should be bought, sold, or held by you.‚Äč Readers should always do their own due diligence and consider their financial goals before investing in any investment product and consult your financial advisor before making any investment decisions.


Cryptocurrency Provides Diversification

One of the arguments for owning cryptocurrency is that it can actually help diversify your investment portfolio as historically, there is a low correlation between cryptocurrencies like Bitcoin and traditional assets like stocks and bonds. 

In the investing context, correlation is a measure of how different assets prices move relative to each other.

It is calculated using a formula that produces a coefficient with values ranging between -1.0 and 1.0.

  • A perfect positive correlation¬†means that the correlation coefficient is exactly 1.
    This means that both assets’ prices will move in the same direction together.
  • A perfect negative correlation is exactly -1.
    This means that both assets’ prices¬†will move in exactly opposite directions.
  • If the correlation is zero, it means that both factors are not related at all.

Negative Correlation

  • Any value between -1.0 and -0.8 suggests a high negative correlation¬†between the two assets.
  • Any value between -0.7 and -0.5 represents a moderate negative correlation.
  • Any value between -0.5 and 0.3 represents a low negative correlation.
  • Any value between -0.3 and -0.01¬†represents almost no negative correlation.

Positive Correlation

  • Any value between¬†0.01¬†and¬†0.3¬†represents¬†almost no positive correlation¬†between two assets.
  • Any value between¬†0.3¬†and¬†0.5¬†represents a¬†low positive correlation.
  • Any value between¬†0.5¬†and¬†0.7¬†represents a¬†moderate positive correlation.
  • Any value above¬†0.8 and 1.0 suggests a high positive correlation.

 

Source: Wellington Management Company

As you can see from the table above, Bitcoin’s price has almost no positive correlation with assets like US stocks and is almost unrelated to Gold.

Source: Cryptowatch

In addition, Bitcoin also has a largely moderate positive correlation with five of the biggest altcoins (excluding Tether (USDT) as the price is pegged to USD) at the time of writing.

If you are bullish that cryptocurrency adoption will become increasingly widespread over time, you should consider owning some cryptocurrency as part of a well-diversified investment portfolio.

But, you need to really do your due diligence and develop an investment thesis as to why the cryptocurrency you are investing in will survive the test of time despite the risks.

Don’t Invest What You Cannot Afford to Lose

There’s no denying that investing in cryptocurrencies is a risky endeavour due to their speculative nature, high volatility and risk of losing your capital.

Take it from Singapore’s Senior Minister and Minister-in-charge of the Monetary Authority of Singapore (MAS) Tharman Shanmugaratnam.

In a written response to parliament submitted on 5 April 2021, Mr Shanmugaratnam stated that

Cryptocurrencies can be highly volatile, as their value is typically not related to any economic fundamentals. They are hence highly risky as investment products, and certainly not suitable for retail investors. MAS has issued numerous consumer advisories to warn the public of the risks of trading these products.

The risk is definitely there but therein lies the greater potential for reward.

Year to date, Ethereum’s price has gone up by about 338% despite the huge 58% drop from its all-time high in May to a low in July.

Source CoinMarketCap

In comparison, the S&P500 index is ‘only’ up about 19% year to date.

At the risk of overgeneralising, buying cryptocurrencies is more speculative in nature as the industry is still in its infancy with many different cryptocurrency platforms vying to survive.

I would liken investing in cryptocurrencies to investing in early-stage start-ups with great ideas with no battle-tested business model just yet.

You will be surprised to see which cryptocurrency platforms will survive after 10 to 20 years.

Take the top ten companies of the S&P 500 index in 2011 and 2021 (as of 19 August 2021 close).

Source: ETF Database | S&P 500 Top Ten Companies in 2011
Source: Slickcharts | S&P 500 Top Ten Companies in 2021

In a short span of 10 years, Exxon Mobil, IBM, Chevron, Wal-Mart, General Electric and P&G have been overtaken.

You might be bullish about the future of cryptocurrencies, but you need to be aware that not all cryptocurrency platforms will survive.

Your investment might go south and you might not profit and worse, lose most of your capital.

Thus, you should only invest money you are willing to lose.

More specifically, losing this money should not cripple you financially or jeopardise your personal finance goals.

But how much exactly?

How Much of My Investment Portfolio Should I Allocate to Cryptocurrencies?

A study published by Yale economist Aleh Tsyvinski in August 2018 suggests that Bitcoin enjoys higher potential returns than other asset classes like stocks, currencies, and precious metals.

The study added that optimally, investment portfolios should contain 6% bitcoin (BTC). 

Even if you are not too bullish about BTC, the study suggests you should allocate about 4% of your portfolio to it.

But if you are a hardcore cryptocurrency sceptic, you should consider investing about 1% of your assets into bitcoin to diversify your portfolio.

In addition, Tim Enneking, managing director of Digital Capital Management has also stated that:

Everyone should have 1-2% of their portfolio in crypto-assets and that enthusiasts can have up to 5-10%.

So 1- 5% is the sweet spot if you are just starting out.

This is made with the assumption that the rest of your investment portfolio is made up of assets that are well diversified.

These are some recommendations or guidelines you might want to follow.

But overall, if you have done your due diligence and decided that cryptocurrencies have a place in your portfolio, there is one more thing to bear in mind.

You need to really think about your level of risk tolerance, and how financially and emotionally prepared to lose that amount in your investment portfolio.

If the thought of losing half of it gives you sleepless nights, you should reconsider your risk tolerance levels.

After all, this is still personal finance.

Don’t Forget to Rebalance

Let’s say you buy some cryptocurrency holdings doubles or triples.

You should consider rebalancing your overall investment portfolio by taking profit and selling off part of your cryptocurrency holdings and funnelling the money to your other investments to maintain the target allocation.

This is done to avoid concentration risk which has the potential to wreck your investment portfolio when one holding gets too big and its value falls like a rock.

Let’s say your overall investment portfolio is worth $1,000 and is made up of:

  • 80% stocks ($800)
  • 15% bonds ($150)
  • 5% Crypto. ($50)

After HODLing it for a while your crypto holdings doubled to $100. This new amount would make it 9.5% of your current overall portfolio.

To rebalance your investment portfolio, you would have to sell off $47.50 of your crypto holdings and reinvest $40 into stocks and $7.50 into bonds.

This can be done every six months or once a year to minimise costs.

Otherwise, you could choose to invest $800 more into stocks and $150 more into bonds to bring it back to the target allocation for your cryptocurrency holdings back to 5%,


Can’t Get Enough of Cryptocurrencies?

Fret not!

We have partnered with SingSaver and American Express to launch this super exclusive Bitcoin campaign for the first time ever in Singapore.

You will receive up to S$365 worth of Bitcoin when you successfully apply for a credit card. This offer is ONLY available on Seedly & SingSaver. You will not find it anywhere else.

These rewards will be given out from now until 7 November 2021 OR until S$1 million worth of Bitcoin has been claimed, whichever is earlier.

Also, the first 2,000 eligible applicants will receive an additional S$100 worth of Bitcoin so get to it!

If you were wondering, these rewards will also be given out to your Gemini account as they are our exclusive cryptocurrency wallet partner for this campaign.

How to Apply:

  1. Apply for your favourite credit card.
  2. Receive up to S$265 (S$265 for new customers and S$50 for existing customers) worth of Bitcoin after you fulfil the eligibility requirements.)
  3. Spend S$500 on the card within the first 30 days of card approval.
  4. Be one of the first 2,000 eligible applicants to receive up to an additional S$100 worth of Bitcoin.

Eligible Cards: American Express in Singapore

Here are the cards you can apply for with this campaign:

More details about the cards can be found on the landing page. And of course, terms and conditions apply.

Disclaimer: Seedly and Singsaver will never ask you for your crypto wallet address nor instruct you to transfer any crypto to us throughout any of the campaigns.

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About Joel Koh
History student turned writer at Seedly. Before you ask, not a teacher. I hope to help people make better financial decisions and not let money control them.
You can contribute your thoughts like Joel Koh here.

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