Don Friedman, President of Digital Assets Council of Financial Professionals, joined Keith Black, Managing Director of RIA Channel, to discuss the three key questions advisors ask about cryptocurrencies and digital assets.
First, bitcoin has been the highest-performing asset class in nine of the last twelve years. Second, advisors note that their clients are expressing concerns about volatility, who may not have noticed that it has been trending down in recent years. Third, advisors ask about correlation, which averages about 0.49 to stocks. Friedman notes that these characteristics of strong performance, declining volatility, and low correlation can give comfort to clients and potentially a strong future in the asset class.
Many investors initially allocate between 1% and 3% of their portfolio to digital assets, which can be fully invested in bitcoin and Ethereum. While many investors equally weight bitcoin and Ethereum, the market capitalization weight is closer to 75% bitcoin and 25% Ethereum. Due to the volatility of digital assets, Friedman recommends dollar-cost averaging, which avoids adding the entire allocation at record-high prices. If volatility continues to trend lower and correlations don’t rise substantially, adding a 1% to 3% allocation to digital assets is not likely to increase the total volatility of a portfolio invested in stocks, bonds, and digital assets.
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