As new investors rush to buy Bitcoin, many are wondering how much of their investment portfolio they should put into the digital currency. BlackRock, the world’s largest asset manager, has the answer: no more than 2%.
The native cryptocurrency is known for its volatility: this year alone, Bitcoin has risen from $43,000 to over $103,000, while in 2021 it crashed from $67,000 to $17,000. It is relatively new and often deviates from well-documented patterns associated with other assets, making it difficult for investors to assess risk.
BlackRock suggests that investing up to 2% of a multi-asset portfolio in Bitcoin is a “reasonable range,” according to a report released Thursday. The asset manager, which forayed into cryptocurrency this year with the launch of its spot Bitcoin exchange-traded fund, says this weighting carries a similar risk as the Magnificent Seven – a group of mega-cap tech stocks – in a typical portfolio consisting of 60% shares and 40% bonds.
“Why not more? “Going further, Bitcoin’s share of total portfolio risk would increase sharply,” the report said.
When considering Bitcoin, BlackRock suggests that investors take a “risk budgeting approach.” That’s defined as determining how much to allocate to a particular investment based on how much that asset will contribute to the overall risk of the portfolio, as measured by its volatility and correlation with the movement of other assets.
In addition to its high volatility, Bitcoin’s value often has a low correlation to other assets, according to a BlackRock report published in September. Because Bitcoin is a decentralized currency isolated from major geopolitical risks and inflation, it is a “unique diversifier,” the company said. Dedicating up to 2% of a portfolio to Bitcoin adds another source of return without introducing excessive risk, the report said.
But Thursday’s report makes it clear that Bitcoin’s future is still unknown and its attractiveness as an investment could change. BlackRock warns investors to remain alert to Bitcoin’s volatility and vulnerability to sharp sell-offs.
“Taking all of this into account, we see a case for including Bitcoin in multi-asset portfolios – provided you believe it will become more widely adopted in the future and you are comfortable carrying the risk of potentially rapid price declines,” the report said.
This story originally appeared on Fortune.com
