Volatility is nothing new for crypto investors, and 2025 has been a wild year, with bitcoin climbing above $125,000 in October before experiencing several sharp declines – peak to trough, a drop of more than $40,000 from its all-time high.
“Crypto is a volatile asset class, and in some sense it’s impossible to avoid that volatility,” said Zach Pandl, head of research at Grayscale Investments, a digital currency asset management firm 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 is now trading near $88,000, and whether the next move is up or down, investors in the crypto space need to have what it takes to endure 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 risky nature of crypto. These are some of the ideas to consider.
Identify the appropriate size of your wallet.
The first step is to ensure that your crypto position size within your wallet is appropriate. Some financial advisors are taking risks and telling investors to hold up to 40% in crypto. But for most investors, there’s a strong case to be made for crypto remaining just a modest part of a broadly diversified portfolio. This can vary based on an individual’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. However, many investors opt for a smaller allocation, often between 1% and 3%.
Consider reducing the risk level of your other securities.
David Siemer, co-founder and managing director of Wave Digital Assets, an investment advisory firm specializing in digital asset management, highlighted the importance of ensuring the rest of an investor’s portfolio is aligned to help keep volatility at a comfortable level. This could mean a less strong preference for the market’s leading growth stocks across the portfolio.
“Because (cryptocurrencies) are either going to give you rocket fuel or the other way around, you probably want to be a little heavier on value stocks or bonds, for example,” he said.
Diversify within the crypto asset class.
Bitcoin is the largest digital asset by market capitalization, but there are many others with valuable use cases, Pandl said. Add exposure within a crypto wallet to ether and the Solana cryptocurrency, for example, “can be a way to make sure you capture all of these trends in your portfolio,” he said. This approach can improve risk-adjusted returns in the same way that diversification improves risk-adjusted returns in other asset classes, Pandl added.
Still, investors should recognize that other types of crypto are highly correlated to bitcoin, so there is only some diversification possible within the crypto itself, Siemer said.
Other advisers warn that many of the non-Bitcoin digital assets that are becoming popular still trade more like tech stocks than stores of value. It’s too early to know how their trading will evolve, investment advisor Nate Geraci, president of NovaDius Wealth Management, told CNBC’s “ETF Edge” earlier this year, and they could remain more closely tied to risk in the market than bitcoin itself over time.
Using ether as an example, Geraci said: “I view it more as a tech play than bitcoin, which many view as digital gold. It takes time for advisors and investors to become familiar with how it fits into a diversified portfolio. Frankly, it’s very early,” he added.
Buy a range of ETFs or embrace the concept of a crypto index fund.
The crypto ETF landscape has expanded significantly since the Securities and Exchange Commission approved 11 Bitcoin spot exchange-traded funds in January 2024. Bitcoin and Ether spot ETFs have garnered billions in institutional inflows, and asset managers are actively filing for ETFs covering solana, XRP, litecoin, cardano and more, with the Fidelity Ethereum Fund (FETH) and Solana ETF (SOLZ) as examples.
Investors should expect many more ETFs to launch over the next year, which will provide additional consumer options and diversification opportunities, Pandl said.
Investors can also now take an index-based approach within ETFs, providing a convenient way to diversify into cryptocurrencies 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 cap. As of December 8, seventy-five percent of assets were bitcoin, but this automatically rebalances based on market capitalization, Pandl said.
The recently launched Bitwise 10 Crypto Index ETF (BITW) contains 10 crypto assets, including Bitcoin, Ether, XRP, Solana, Chainlink, and Litecoin. This is the first ETF to also include exposure to Cardano, Avalanche, Sui and Polkadot. But as with the Grayscale crypto index fund, it is important for investors to understand that holdings remain heavily weighted in the more established cryptocurrencies. BITW allocates 90% of its holdings to bitcoin and ether.
Hire a crypto-friendly financial advisor.
One way to encourage diversification – and protect against large portfolio swings – is to work with a financial advisor who can help you create a sufficiently diversified portfolio that includes crypto. Not all advisors incorporate crypto into their model portfolios, but that is starting to change as digital assets gain traction.
Thryve Wealth Management, for example, uses bitcoin as a hedge against the US dollar. Randol W. Curtis, chief investment officer, said that if inflation remains between 2.5% and 3%, it will cause a significant erosion in the purchasing power of the U.S. dollar. That’s where bitcoin comes in. “Each bitcoin will be worth more and more dollars every year as the dollar swells,” Curtis said. The company is also investigating Ethereum and Solana platforms, used primarily for stablecoins.
Ric Edelman, who heads the Digital Assets Council of Financial Advisors, told CNBC earlier this year that crypto’s mainstream adoption phase is occurring at a time when investors are having to hold stocks later than ever to provide retirement income security, and bonds are not able to play the same role as they did throughout the 20th century. As the asset allocation model shifts away from the classic 60% stocks/40% bonds approach, crypto needs to play a larger role in investing, he says.
There are now crypto ETFs offering an income component to perform some of the functions that bonds once performed within a portfolio, including Simplify Bitcoin Strategy PLUS Income ETF (MAXI) and a planned Bitcoin income fund from the world’s largest asset manager, BlackRock.
Dollar cost averaging and rebalancing in the crypto market.
Another way to reduce the volatility of cryptocurrencies is dollar cost averaging, which involves systematic weekly or monthly purchases of cryptocurrencies. That way, whether it’s up or down, you’re buying at different prices, which will reduce volatility, said Steve Larsen, president of Columbia Advisory Group and co-founder of the Certified Digital Asset Advisor designation.
Larsen also advises regular rebalancing of cryptocurrencies. He gives the hypothetical example of an investor who holds 5% of his portfolio in bitcoin, which rises to 7% depending on market appreciation. The investor would then have to sell 2% of their bitcoin holdings and use the proceeds to purchase other assets. If bitcoin makes up too small a percentage of the portfolio, the investor can buy more, Larsen said.
Advisors have professional tools to automatically rebalance portfolios. Additionally, most large retail brokerages offer rebalancing and trading tools to their clients as part of their online account tools. The problem is that many do-it-yourself investors don’t take the time to do this.
“The reason people are stunned by Bitcoin is because they don’t treat it like anything else,” said Ivory Johnson, founder of Delancey Wealth Management. If you had tech stocks and never rebalanced when tech stocks fell, you would blame yourself. Bitcoin is the same thing. “It’s going up, and people think it’s going to continue to go up. Treat crypto like any other asset class,” he said.
Johnson points to previous market cycles in which investors made risky bets based on unbridled optimism. “There are people who lost all their savings because they thought General Motors couldn’t go bankrupt.” In 2009, it was one of the largest corporate bankruptcies in U.S. history.
Consider downside protection ETF products.
Some investors who want to get into crypto, but prefer downside protection, might consider a principal-protected security, a financial instrument that returns the principal amount invested at maturity, regardless of how the price of the underlying asset changes.
Several companies offer this type of product. Calamos Investments, for example, launched the first “downside protection” crypto ETF in January, the Calamos Bitcoin Structured Alt Protection ETF (CBOJ). The fund company offers several ETFs using this strategic approach with varying levels of downside protection: 100%, 90% or 80%.
Of course, there are management fees associated with ETFs, and even higher fees on more sophisticated products. The iShares Bitcoin Trust (IBIT) has an annual management fee of 0.25%, compared to 0.69% on the Calamos Bitcoin ETF. But some investors prefer to use professional managers rather than invest directly on their own, Siemer said. “For some people, there is value in doing it with a simple, easy-to-purchase product,” he added.
