When you invest, you are taking a monetary risk — and weighing opportunity costs. Even “safe investments” like treasury bills and bonds aren’t totally risk free. However, they are significantly less risky when compared to stocks and alternative assets. Simply holding your savings in U.S. dollars (USD) is also not a risk-free endeavor. For one, you are guaranteed to gradually lose your savings’ purchasing power through the wealth-confiscating effects of inflation. 

Some with savings in other fiat currencies have experienced substantial losses. For example, the Argentinian peso had a yearly inflation rate in excess of 115% – and has lost 90% of its purchasing power since 2019. For this reason, many Argentinians are using USD, crypto, or both in an effort to preserve their wealth and as an inflation hedge.

In general, taking bigger investing risks comes with bigger potential returns — or losses. Taking a more conservative investing approach is considered less risky but also comes with less upside potential.

Comparing Stocks, Bonds, and Crypto

Fixed-rate investments give you a predictable and steady rate of return. These investments (bonds, money-market funds, and certificates of deposit) are the most predictable, but the rate of return may vary based on your purchase date, current interest rates, or market conditions. They are considered the “safest,” but may not even keep up with inflation in certain market conditions.

Stocks are considered a middle ground in terms of risk. While they can perform better than bonds, they can also drop in value. In general, investing in a variety of stocks makes sense for many people because this “risk” is outweighed by the financial reward when they perform well (especially over the long term)

Alternative assets are considered the most risky — but tend to come with the highest returns when they pay off. Examples of alternative assets include precious metals, real estate, fine art, venture capital, and cryptocurrency. Within this sector, there is also a divergence in risk, which should also be considered. For example, many would say precious metals would be a less risky investment than venture capital.

How to Construct An Investing Portfolio

The common investing standard for some time was a balanced portfolio of stocks and bonds — with 40–60% in stocks. This asset allocation is intended to provide better returns than investing in either asset class alone. In general, the distribution of investments changes with time based on one’s age and risk tolerance. Older investors and retirees tend to have a higher percentage in bonds (sometimes 90–100%) as they provide a steady “investing income.” Younger investors may go 80–100% in stocks due to the higher growth potential. They can ride out bad months and years (and take more risk) by taking a long-term approach that should outperform a portfolio that is more bond-heavy.

Of course, with these allocations, it begs the question: Where does crypto investing fit in? Over 50 million Americans already own crypto, but it is neither a stock or a bond. For this reason, some (especially crypto enthusiasts) say that the old investing wisdom is outdated. These days, an investment portfolio could look something more like this: 60% stocks, 25% alternative assets (crypto or otherwise), 15% bonds.

Investing in crypto, an alternative asset, involves forgoing some bond or stock investment. Those that have already bought crypto have weighed these opportunity costs and come to the conclusion that it makes sense for them. If you haven’t invested in crypto and are considering it, we’ll give you some frameworks that may help you decide if — or how much — you should invest.

Is Crypto Investing Right for Me?

To crypto or not to crypto, that is the question. While no one can decide for you, here are some useful things to consider when it comes to crypto investing. First, are you very conservative and risk-averse when it comes to investing? If you’re very cautious, you may be better off forgoing investing in crypto altogether. While some long term crypto HODLers can calmly ride the waves of price volatility, those that are risk averse are more likely to panic sell — and lose money. Or, if you are risk averse, you may want to allocate a very small percentage in crypto. For example, your portfolio could look something like this: 60% bonds, 38% stocks, and 2% crypto. This could allow you to benefit from the asymmetric upside price movement — while not losing sleep at night if the price drops 10%+ in a few days.

Do you understand crypto well? Can you explain the difference between Bitcoin and Ethereum? Can you explain DeFi? If not, you may want to get a basic understanding of these things prior to making an investment. Many investors (especially those that use fundamental analysis) say that you shouldn’t invest in something you don’t understand (blockchain, AI, and so on). You can learn a great deal by reading beginner-focused articles and books — and immersing yourself in crypto Twitter (or crypto X with the rebrand). You can also watch explainer videos and listen to crypto-focused podcasts. This self-study can help you make a more informed decision.

In keeping with your appetite for risk, you should ask yourself if this is a good investment at your age. Based on recent surveys, around 20% of millennials and 4% of baby boomers own crypto. In general, a 25-, 50-, and 75-year old will invest very differently — with younger investors being more willing to — or more able to — accept risk. For this reason, older investors tend to have a portfolio that is mostly bonds and/or stocks. Younger investors could have a significant portion of their investments in alternative assets. For example, a 20-something with a high risk tolerance could have 60% in alternative assets (40% crypto, 10% real estate, 10% other) and the remainder in stocks (with no bonds). Financial advisors would not recommend this for a retiree depending on a fixed income.

In summation, these are simply guidelines. Investing in crypto is largely dependent on your age, appetite for risk, personal financial situation, and a host of other factors. 

Diversification of Crypto Allocations

While some crypto investors only purchase BTC or ETH or some other crypto, most would recommend buying a basket of cryptos — with varying use cases. For example, many stock investors buy indexes that are composed of 100 or 500 of the biggest stocks on an exchange. It wouldn’t be recommended to only buy one stock like Tesla (TSLA). Further, it also wouldn’t be recommended to buy a basket of stocks within the same industry (like buying stocks in GM, Ford, Daimler Chrysler, Tesla, etc.).

That same portfolio diversification strategy can also likely reduce risk when it comes to one’s crypto portfolio. A sample diversified crypto portfolio could look something like this: BTC (30%), ETH (20%), ADA (5%), XMR (5%), BCH (5%), and a selection of 14 other cryptos (at 2.5% each). You may want to be conservative (relatively speaking) by only investing in projects in the top 50 or 100. Or maybe you want to pick some outside the top 100 that you believe have a good return potential. On top of this, you want to diversify your portfolio based on the use cases, so maybe your portfolio has some DeFi projects (UNI, AAVE, COMP), oracles projects (LINK, BAND, UMA), gaming tokens (AXS, SAND, APE), and prediction market projects (GNO, PNK, REP). 

The idea here is that while some crypto sectors may stumble, other sectors could flourish. By diversifying by use case, you have a better chance of being invested in the sectors that perform well (while other sectors may struggle). This is the same reason you would diversify your stock portfolio into various industries and sectors.

Assets that perform differently are referred to as uncorrelated assets. Assets with low correlation have a tendency to behave differently (such as one rising in value while another goes down in value) while high correlation assets tend to track each other’s price movements. As crypto is increasingly seen as uncorrelated with other investing sectors, this is an additional reason why it may make sense to add crypto investments to a more traditional portfolio of stocks and bonds.

Rebalancing Crypto Allocations

You may also want to consider rebalancing your crypto portfolio periodically. This may be done to reduce risk, remove underperforming or losing cryptos, or to gain exposure to new crypto offerings. Some index tokens (such as DPI) give you exposure to a variety of cryptos and rebalance automatically on your behalf on a monthly basis.

In general, it may be wise to rebalance around every 4–6 months. For U.S. investors, it may be wise to rebalance every 12+ months in order to take advantage of long-term capital gains taxes (yes, you must pay taxes on profitable trades). Oftentimes, investors may try to invest more in high-cap cryptos (and stablecoins) during bear markets — while investing in lower-cap cryptos in bull markets to ostensibly boost investment returns.

Crypto Rebalancing over the Long Term

In much the same way that the percentage of stocks and other alternative assets tend to decrease as one ages to reduce risk, it may be wise to reduce one’s crypto allocation percentage as one ages. However, long-term crypto investing is still largely in uncharted waters. For those that believe in a paradigm-shifting cryptocurrency-enabled DeFi revolution, they would argue that one’s allocation in crypto could — or should — increase as it gains market share from legacy alternatives.

Let’s paint a bright crypto investing scenario: The year is 2040 and your crypto portfolio has done very well. You are a few years from retirement. At this time, you may want to reduce your crypto allocation by diversifying into other alternative assets, stocks, and bonds. Your alternative asset allocation (in this case, crypto) has paid off handsomely and now you want to reduce your investing risk. You may want to trim (reduce) your crypto positions by diversifying into less risky investments (if crypto is still deemed risky in 2040).

Who knows? By 2040, it is likely that your diversification into stocks and bonds will also be on the blockchain as these assets — and real estate — get tokenized. In this scenario, you may have nearly all investments on the blockchain. However, some will represent these real-world assets (RWAs) while other cryptos will strictly be on the blockchain (BTC, ETH, and others) with no ties to RWAs.

Buying, Selling, or Losing the House

Successful crypto investors have purchased homes and real estate (for themselves or loved ones) from crypto profits. Others who were less successful — and took on outsized risk — have ended up losing their homes in foreclosure. Others have sold their house and used 100% of the proceeds to buy crypto. Ultimately, you have to practice risk management to reduce the chances of having steep crypto investing losses — while giving yourself a good chance to profit from this investing opportunity with an asymmetric upside that is often associated with substantial price volatility in either direction.

If you have calculated your risk properly, you have the potential to earn enough in profits to achieve your financial goals — without exposing yourself to the steep financial losses of those who didn’t practice portfolio diversification and risk management. In the next article, we’ll wrap up this series by covering a few of the tools and tips that you can use to simplify your investing journey.

Cheat Sheet

• No investments are risk free. You are taking on risk for the chance to profit from your investment.
• Traditional investment advice used to include having a balanced mix of stocks and bonds. Newer investment advice may include having investments in alternative assets such as crypto.
• Crypto investing has seen some of the highest investing returns, but is also considered one of the riskiest types of investments.
• Practicing good risk management may include not investing more than you are willing to lose. This is especially pertinent advice when investing in volatile assets like crypto (which means you may want to invest in other assets as well).
• You may be able to reduce your crypto investing risk by purchasing a variety of cryptos and/or purchasing cryptos that solve different use cases (or are considered to be in different crypto sectors).
• Risk management should take into account your age, your tolerance to risk, your personal financial situation, and a host of other factors.
• To manage risk, you may want to rebalance your investing portfolio (of both crypto and other assets) periodically to trim from well performing (but risky) positions and adding to safer investments within your portfolio.