A recent study by Charles Schwab reveals that even a small allocation of 1% to 3% in Bitcoin (BTC) or Ethereum (ETH) can significantly affect the overall risk profile of an investment portfolio. According to ChainCatcher, the research indicates that both Bitcoin and Ethereum have historically experienced declines exceeding 70%, which is much higher than the volatility levels of stocks or bonds. As a result, even minor allocations can have a noticeable impact during periods of market fluctuation.
Charles Schwab suggests two methods for allocating crypto assets: the traditional portfolio theory approach and the risk budgeting method. The traditional approach involves allocation based on expected returns, volatility, and correlation. However, due to significant differences in return assumptions, even aggressive investors may find it challenging to justify large allocations if expected returns are below 10%. The risk budgeting method focuses on the level of risk an investor is willing to take, shifting the emphasis from returns to risk tolerance. Despite this, the volatility of crypto assets may still exceed expectations.
Charles Schwab emphasizes that crypto assets are highly volatile and may not be suitable for all investors. It advises investors to carefully consider their risk tolerance, investment horizon, and familiarity with the assets before making allocations. Additionally, investors should be mindful of risks related to liquidity, theft, and fraud.