4 Questions to Ask About Allocating to Crypto in Portfolios
Tom Lauricella - 30 June, 2025 | 8:32PM
Indexing, volatility, correlations, and portfolio weighting are key factors to consider.

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As exchange-traded funds broaden the reach of bitcoin and other cryptocurrencies, investors have more to consider when it comes to portfolio allocations around this growing asset class.

At the Morningstar Investment Conference on in Chicago, T. Rowe Price portfolio manager Erin Garrett, Bitwise senior investment manager Juan Leon, and BlackRock head of digital assets Robert Mitchnick offered their views on some key questions for investors and advisors. Some quotes have been edited for clarity.

Should Investors Index Crypto?

While most investors are now familiar with bitcoin and possibly ethereum, there are thousands of cryptocurrencies. Among ETFs, the largest strategies focus on bitcoin, ether, or a combination of the two. But broader investment strategies are beginning to be offered. One starting point is to consider whether to focus solely on bitcoin or branch into strategies that include other cryptocurrencies.

At BlackRock, which offers only bitcoin and ethereum strategies, Mitchnick said investors should focus on the largest and most actively traded cryptocurrencies. “It’s natural for a lot of traditional investors to look at this new asset class and ask: If I only own Bitcoin, aren’t I missing out on a diversified basket? That’s what you get with an index in crypto today. There’s no diversification to be had. Most other crypto is levered beta—to the price of Bitcoin plus their own idiosyncratic risk. Bitcoin’s supremacy is not [really] being challenged. [There are] different applications of blockchain technology, but a lot of those have been a little bit slow in getting traction. That doesn’t mean they won’t get traction, but you just have to be discerning.

Mitchnick continued: “Frankly, it’s hard to even build a basket of 10 [currencies] today that are credible. So once you get to 50-100, you’re really into deeply speculative, very volatile early stage [territory].”

Meanwhile, Bitwise offers index strategies with multiple cryptocurrencies. “This is a great space—especially now that it’s nascent—to take an index approach and bet on the category as a whole, [instead of] picking individual names,” said Leon. He compared the current cryptocurrency landscape to the dotcom era. “There were so many different companies coming onto the internet, so much buzz, and just a few winners. An index approach is appropriate for many clients, as it’s a way to get to the space without having to pick one or two [currencies].”

Garrett offered another analogy: bitcoin as the equivalent of owning Apple stock and treating that as exposure to the entire technology sector. “If you don’t have the time to do all the research, to do the tokenomics, to read through the white papers, then I would say it’s better to go for an actively managed approach,” she said.

How to Approach Crypto Volatility

Cryptocurrencies have been notoriously volatile since their inception. Those wide swings shape how investors should view them as an allocation. However, the panelists downplayed crypto’s historic volatility as a consequence of its growth and functionality.

“Look at the journey Bitcoin is on, and [compare that] to the journey gold took,” Leon said. “Gold saw incredible volatility for a couple of decades. But as it became more institutionally adopted and embedded into portfolios and accepted and used as a store of value, its volatility went down.”

Part of cryptocurrency’s volatility stems from its historical investor base among quick-trading individuals. “If you look at the S&P 500, it’s owned about 85% by institutions, 15% by retail investors,” Leon said. “With Bitcoin, it’s the other way around. It’s about 15% owned by institutions and 85% owned by retail investors. But that ratio is switching, and as that continues, I think the volatility will decrease.”

How Correlated is Bitcoin to Other Investments?

Mitchnick noted that from an asset allocation standpoint, how bitcoin moves in relation to other investments is what matters. Most large institutional investors with crypto allocations tend to hold low-single-digit weightings in bitcoin or bitcoin ETFs, and even with the high volatility, “a lot of it is diversified [and] not going to have a huge impact on portfolio volatility [when held in] modest amounts.”

In the longer term, Mitchnick said bitcoin’s correlation to the S&P 500 is close to zero, similarly to gold. That means bitcoin’s moves have generally not had a relationship to those of stocks. A correlation of 1 would mean two assets tend to move in tandem, while a -1 correlation would mean they move in opposite directions.

However, for shorter periods, that hasn’t been the case. “It has these periods where correlation spikes, ”and that creates a lot of confusion in the market," Mitchnick said. For investors looking ahead, the questions become “How rare are they and how long [do] they last on a longer term basis? What is the actual correlation that’s driving portfolio outcomes? He continued: ”If that correlation were to drift upward over time and stay elevated, then bitcoin becomes an interesting asset to way fewer investors. If that correlation goes solidly to zero over time or even negative, then it starts to become a really critical instrument.”

How Much Bitcoin Should Investors Hold?

“When you have a highly volatile asset that has a relatively low correlation with your other assets, you can use it to increase potential return and diversify the portfolio,” said Leon. “We’ve done studies of different allocations of different rebounds here in bitcoin, and generally, we find a 1%-5% allocation is a sweet spot, with about 3% maximizing your Sharpe ratio portfolio, where the allocation increases your portfolio’s returns without meaningfully impacting its drawdown or volatility.”

Garrett considers crypto along the same lines as other alternative investments. “If you look historically, the risk returns would look comparable to venture capital” or other private markets. Another comparison point could be high-growth equities. Overall, “I would consider low-single-digit [percentages], which is also aligned with our research,” she said. “That gives you the greatest risk adjusted return [and] isn’t going to dominate [a portfolio].” In addition, it’s important to be “very methodical about rebalancing.”

Garret added that investors need to take time to understand cryptocurrencies and their specific strategies. “No doubt there are diversification benefits … but I would just say, as with ‘past performance is not indicative of future results,’ if you don’t understand the investment, you shouldn’t invest."


The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.