Crypto portfolio diversification is gaining traction as investors look for ways to manage sharp price swings in digital assets after a volatile year for bitcoin and other cryptocurrencies (21/12). In 2025, bitcoin rose above $125,000 before falling more than $40,000 from its peak, highlighting ongoing market instability.

“Crypto is a volatile asset class, and in some sense, there is no avoiding that volatility,” said Zach Pandl, head of research at Grayscale Investments. He said investors pursue crypto as an alternative asset with distinct return characteristics.

Bitcoin is now trading near $88,000, keeping risk management a central concern for market participants.

Investors Reassess Crypto Allocation Within Portfolios

Appropriate portfolio sizing is increasingly viewed as the first step in reducing crypto-related risk. Some advisors suggest allocations as high as 40%, but many professionals argue crypto should remain a modest portion of a diversified portfolio.

A common guideline is to limit crypto exposure to no more than 5%, with many investors choosing allocations between 1% and 3%, depending on age, income, and risk tolerance.

Diversification Within Crypto Offers Benefits and Limits

Beyond bitcoin, investors are adding exposure to other digital assets such as ether and solana to capture broader market trends. Pandl said this approach can improve risk-adjusted returns, similar to diversification in other asset classes.

David Siemer, CEO of Wave Digital Assets, said many cryptocurrencies remain highly correlated with bitcoin, limiting diversification benefits. Some advisors also caution that non-bitcoin assets often trade more like technology stocks than stores of value.

“I view it more as a tech play than bitcoin, which many view as digital gold,” said Nate Geraci, president of NovaDius Wealth Management, referring to ether.

Crypto ETFs Expand Access to Diversification Strategies

The crypto ETF market has expanded significantly since regulators approved spot bitcoin ETFs in January 2024. Bitcoin and ether ETFs have drawn billions in institutional inflows, while asset managers are seeking approval for funds linked to solana, XRP, and other digital assets.

Index-based products such as the Grayscale CoinDesk Crypto 5 ETF and the Bitwise 10 Crypto Index ETF offer exposure to multiple cryptocurrencies, though both remain heavily weighted toward bitcoin and ether. Pandl said additional ETF launches are expected in the coming year.

Traditional Investment Practices Applied to Digital Assets

Advisors are increasingly urging investors to apply classic portfolio strategies to crypto, including dollar cost averaging and regular rebalancing. These approaches can help reduce volatility and prevent crypto holdings from becoming misaligned within a portfolio.

“The reason people get stunned with bitcoin is they don’t treat it like anything else,” said Ivory Johnson, founder of Delancey Wealth Management. He emphasized managing crypto in the same way as other asset classes.

Some investors are also considering downside-protection crypto ETFs, which aim to limit losses while maintaining exposure, though these products typically carry higher fees.

PHOTO: FREEPIK

This article was created with AI assistance.