Volatility is nothing new for crypto investors, and 2025 has been a wild ride, with Bitcoin climbing above $125,000 in October, before experiencing several sharp declines – from peak to trough, dropping more than $40,000 from its record high.
“Crypto is a volatile asset class, and in some sense, that volatility cannot be avoided,” said Zach Pandl, head of research at Grayscale Investments, a digital currency asset management company that runs one of the largest bitcoin ETFs, the Grayscale Bitcoin Trust (GBTC). “It is an alternative asset class, and we are looking for its particular return characteristics,” he said.
Bitcoin Now trading near $88,000, and whether the next move is up or down, investors in the crypto sector should have what they need to weather the volatility. There may be some help – in the form of new market ideas and classic diversification concepts – to protect portfolios from at least some of the risk-averse nature of crypto. These are some ideas that should be considered.
Identify your appropriate portfolio size.
The first step is to make sure that your crypto position size is appropriate within your portfolio. Some financial advisors are going to the limit and telling investors to hold up to 40% stakes in crypto. But for most investors, there is a strong case for crypto to remain only a modest part of a widely diversified portfolio. This can vary depending on a person’s age, income, risk profile, and other factors, but a good rule of thumb is to allocate no more than 5% of a well-balanced portfolio to crypto. Still, many investors opt for smaller allocations, often in the range of 1% to 3%.
Consider reducing the risk level in your other holdings.
David Seymour, co-founder and chief executive of Wave Digital Assets, an investment advisory firm specializing in digital asset management, emphasized the importance of ensuring that the rest of an investor’s portfolio is aligned to help keep volatility at a comfortable level. This could mean a less heavy tilt towards market-leading growth stocks in a broader portfolio.
“Because [crypto’s] That’s going to give you either rocket fuel or vice versa, for example, you probably want to be a little heavier on value stocks or bonds,” he said.
Diversify across the crypto asset class.
Pandal said Bitcoin is the largest digital asset by market capitalization, but there are many other assets with valuable use cases. Adding Exposure to Crypto Portfolio ether and this solana Cryptocurrencies, for example, “could be a way to make sure you’re incorporating all of these trends into your portfolio,” he said. Pandal said this approach could improve risk-adjusted returns in the same way that diversification improves risk-adjusted returns in other asset classes.
Still, investors need to recognize that other types of crypto are highly correlated with Bitcoin, Siemer said, so there’s only so much diversification possible within crypto.
Other advisers warn that many of the non-Bitcoin digital assets becoming popular still trade more like tech stocks than stores of value. It’s too early to know how their business will evolve, investment adviser Nate Geraci, president of Novadius Wealth Management, told CNBC’s “ETF Edge” earlier this year, and they may remain more closely tied to riskier market trading than Bitcoin over time.
Using Ether as an example, Geraci said, “I see it more as a technology play than Bitcoin, which many people see as digital gold. It’s taking time for advisors and investors to understand where it fits in a diversified portfolio. It’s too early, frankly,” he said.
Buy a series of ETFs, or buy into the concept of an index-based crypto fund.
The crypto ETF landscape has expanded significantly since the Securities and Exchange Commission approved 11 spot Bitcoin exchange-traded funds in January 2024. Bitcoin and Ether spot ETFs have raised billions of dollars in institutional inflows, and asset managers are actively filing for ETFs covering Solana,
Pandal said investors should expect to see several more ETFs launched next year, which will provide additional choices and diversification opportunities for consumers.
Investors can now also take an index-based approach within ETFs, which is a convenient way to achieve diversification in crypto while managing volatility. Grayscale has an index fund, the Grayscale CoinDesk Crypto 5 ETF (GDLC) which became available as an ETF in September and holds a basket of the top five crypto assets weighted by market capitalization. Seventy-five percent of assets were Bitcoin as of December 8, but this is automatically rebalanced based on market capitalization, Pandal said.
The recently launched Bitwise 10 Crypto Index ETF (BITW) consists of 10 crypto assets including Bitcoin, Ether, XRP, Solana, Chainlink, and Litecoin. It is the first ETF to also include exposure to Cardano, Avalanche, Sui, and Polkadot. But like the Grayscale crypto index fund, it’s important for investors to understand that holdings remain heavily weighted toward more established cryptocurrencies. BITW allocates 90% of its holdings to Bitcoin and Ether.
Use a financial advisor that is crypto friendly.
One way to encourage diversification and protect against large portfolio fluctuations is to work with a financial advisor who can help you craft an appropriately diversified portfolio that includes crypto. Not all advisors include crypto in their model portfolios, but this is starting to change as the attractiveness of digital assets grows.
For example, Thrive Wealth Management uses Bitcoin as a hedge against the US dollar. Chief Investment Officer Randol W. Curtis said that if inflation continues at 2.5% to 3%, this is a significant decline in the purchasing power of the US dollar. This is where Bitcoin comes in. “Every year that the dollar appreciates, each Bitcoin will be worth more and more dollars,” said Curtis. The company is also researching Ethereum and Solana platforms, which are primarily used for stable coins.
Rick Edelman, who runs the Digital Assets Council of Financial Advisors, told CNBC earlier this year that the phase of mainstream adoption of crypto is coming at a time when investors need to hold equities later in life than ever before to achieve retirement income security, and bonds are not able to serve in the same role as they did in the 20th century. He says that as asset allocation models move away from the classic 60% stocks/40% bonds approach, crypto needs to play a bigger role in investing.
Now crypto ETFs are offering an income component to perform some of the functions that bonds once did within portfolios, including the Simplified Bitcoin Strategy Plus Income ETF (MAXI) and a planned Bitcoin Income Fund from BlackRock, the world’s largest asset manager.
Dollar cost averaging and rebalancing in the crypto market.
Another way to reduce the volatility of crypto is dollar cost averaging, which involves systematic weekly or monthly purchases of crypto. This way, whether it’s going up or down, you’re buying at different prices, which will reduce volatility, said Steve Larson, president of Columbia Advisory Group and co-founder of the Certified Digital Asset Advisor designation.
Larson also recommends regular crypto rebalancing. He gives a hypothetical example of an investor who holds 5% of his portfolio in Bitcoin, which increases to 7% based on market appreciation. The investor should then sell 2% of their Bitcoin holdings and use the proceeds to buy other assets. Larson said that if the percentage of Bitcoin in a portfolio becomes too small, an investor may buy more.
Advisors have professional tools to automatically rebalance portfolios. Additionally, most major retail brokerages offer rebalancing and trading tools to clients as part of their online account tools. The problem is that many self-directed investors don’t take the time to do this.
“The reason people are shocked by Bitcoin is that they don’t treat it like anything else,” said Ivory Johnson, founder of Delancey Wealth Management. If you owned tech stocks and never rebalanced when tech stocks dropped, you would be killing yourself. Bitcoin is also a similar thing. “It goes up, and people think it’s going to keep going up to the sky. Treat crypto like any other asset class,” he said.
Johnson points to past market cycles where investors made risky bets based on unbridled optimism. “There are people who lost their entire savings because they thought there was no way that General Motors would go bankrupt.” In 2009, it was one of the largest corporate bankruptcies in US history.
Consider downside protection ETF products.
Some investors who want to invest in crypto but prefer protection from downside may consider a Principal Protected Note, a financial instrument that returns the principal amount invested at maturity regardless of the price movement of the underlying asset.
Many companies offer these types of products. For example, Calamos Investments launched the first “downside protection” crypto ETF, the Calamos Bitcoin Structured Alt Protection ETF (CBOJ), in January. The fund company offers several ETFs using this strategic approach with different levels of downside protection – 100%, 90% or 80%.
Of course, there are management fees associated with ETFs, and more sophisticated products have even higher fees. The iShares Bitcoin Trust (IBIT) has an annual management fee of 0.25%, while the one on the Calamos Bitcoin ETF is 0.69%. But some investors prefer to use professional managers rather than invest directly, Siemer said. “For some people, doing it in a simple product that’s easy to buy is valuable,” he said.
