How Much Should Your Clients' Portfolios Allocate to Crypto? | ETF Trends

Most advisors at this point have encountered questions regarding crypto from their clients. With increasingly greater adoption by institutional investors, the industry is slowly coming around to acknowledging that crypto investment is most likely here to stay and beginning to grapple with how to allocate it into portfolios. CoinDesk tackles this issue in its most recent newsletter.

Advisors generally are approaching portfolio allocation and management from the lens of modern portfolio theory, crafted by economists such as William Sharpe, Harry Markowitz, and Eugene Fama. The general premise is based on behavioral finance research and comes down to the idea that unless the allocations being made to a portfolio are of a material amount, they simply aren’t worth making. It’s the reason that you see advisors investing in something by 10% chunks at a time, rounding allocations into what they deem to be material amounts.

A study done by Yale back in 2019 came to the conclusion that a portfolio should allocate 4%-6% to crypto. What is commonly being seen now is advisors generally allocating between 1%-5% in crypto, with a 1% allocation hitting as sweet spot for investors according to Ric Edelman, founder of the Digital Assets Council of Financial Professionals.

A 1% allocation, Edelman argues, means that a portfolio is still protected in the event of a crypto crash, but would also capture any increase in returns or doubling that might happen within the space. The entrance of so many institutional investors into crypto means that it’s a lot less likely to entirely collapse, despite misgivings by crypto skeptics. 1%, it turns out, in the case of crypto, is indeed a material contribution.

Edelman did the math and found that in a hypothetical situation where an investor who had held a traditional 60/40 portfolio from the 2017 bitcoin bull run until now would have had a return of about 7% in one year, and 14.5% in two years with compound interest. Adding a 1% allocation to crypto (looking at a time when the price of bitcoin grew 1,500% and fell 84%) means that gains could reach 22% in a year and 15.4% in the second year, accounting for the dip. Even if crypto had crashed during that time, returns would have been 6% in the first year and 13.4% in the second.

“This shows that the allocation can materially improve the return but the downside risk is insignificant,” Edelman says.

Gaining Crypto Exposure With Invesco

For investors looking for an opportunity to gain exposure to crypto’s growth, the Invesco Alerian Galaxy Blockchain Users and Decentralized Commerce ETF (BLKC) offers investment in the blockchain innovation making it all possible. The fund is based on the Alerian Galaxy Global Blockchain Equity, Trusts, and ETPs Index.

BLKC invests in companies that are developing blockchain, mining cryptocurrency, buying cryptocurrencies, or else enabling technologies, exchange traded products (ETPs), or private investment OTC trusts tied to cryptocurrency.

The fund does not invest directly in cryptocurrencies or crypto assets and does not invest in initial coin offerings or futures contracts on any cryptocurrencies. It carries an expense ratio of 0.60%.

For more news, information, and strategy, visit the Crypto Channel.