Should I Buy Cryptocurrency? Analysis And Portfolio Approach

Updated: May 14, 2024

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To help investors make informed decisions about how much cryptocurrency belongs in their portfolio, MoneyGeek constructed its own value-weighted cryptocurrency index and analyzed the last seven years of cryptocurrency returns. We compared these returns to the well-known S&P 500 stock index, as well as a bond index.

Our analysis found that both stocks and cryptocurrencies have the potential for significant returns and losses in portfolio value. If your investment horizon and risk tolerance are suitable for these investments, our analysis pointed to the benefits of investing more in stocks than cryptocurrency. However, it also found that holding a small proportion of cryptocurrency investments can also be useful.

Key Findings:
  • $1,000 invested in cryptocurrency grew to $27,000 over five years. From 2016 to 2021, that's a compound annual growth rate of 94%.
  • The S&P 500 outperformed the cryptocurrency index in 2021. From 2013 to 2022, cryptocurrency was four times more volatile than the S&P 500 over the same period and 26 times more volatile than bonds.
  • After an initial period of lower correlation between assets, cryptocurrency and stocks have become more correlated through 2021 into the start of 2022, suggesting that cryptocurrencies may not be viable as a store of value.
  • Incorporating cryptocurrency as a small percentage (3%) into a moderately aggressive long-term portfolio of 70/30 stocks/bonds from 2017 to 2021 would have led to 42% higher investment returns. This comes at the price of 18% higher portfolio volatility.
Graph displaying that the variability of cryptocurrency returns is 4x larger than stocks

Does Cryptocurrency Belong in My Portfolio?

Whether investing in cryptocurrency is a good idea or a bad one depends on your risk tolerance. However, the consensus at MoneyGeek is that cryptocurrency will be around for the long run, and it’s an important new asset class.

The massive volatility of cryptocurrency assets indicates that it’s advisable not to make it a significant portion of your portfolio. That is, aim for 5% or less, not your entire retirement portfolio.

Incorporating a small proportion of cryptocurrency into your portfolio would have increased overall returns at a smaller increase in overall risk over the past five years. In our analysis of historical returns over the past five years for the hypothetical 70/30 stock/bond portfolio, we found that investing 3% of your portfolio in cryptocurrency instead of stocks for a 3/67/30 portfolio saw overall returns increase by 42%.

However, keep in mind that cryptocurrency does increase a portfolio's overall volatility; with our 3/67/30 approach, overall portfolio volatility rises by 18%. It’s also important to consider that cryptocurrency's long-term return and behavior are relatively unknown compared to bonds and stocks, which have been around for hundreds of years. Arguably, as more assets flow into cryptocurrency, rates of return should decline at the benefit of lower volatility.

Illustration of woman looking at investments on six computer monitors

Cryptocurrency: Big Gains for Significant Risk

While cryptocurrency has been around since 2009 — longer than it has been well-known in the public consciousness — it’s still in its infancy compared to other investment vehicles. For a while, no financial advisor who wanted to be taken seriously would recommend putting any money into cryptocurrencies. The $1.9 trillion cryptocurrency market has made many reconsider its place in a balanced investment profile in recent years.

Ever since investors began putting their money into cryptocurrency, they’ve reported dizzying gains and losses. In the five years from 2017 to the end of 2021, MoneyGeek’s cryptocurrency value-weighted index of coins increased 27 times for a 94% annual return.

Along with breathless climbs, there have been harrowing drops in value. The worst week of cryptocurrency returns from 2017 to the end of 2021 was a stomach-churning loss of 39.5%. Most recently, Cryptocurrencies lost 14% of their value in early 2022.

Cryptocurrencies Had Weekly Volatility Four Times Larger than Stocks

A standard measure of risk is volatility, or how much returns fluctuate over time. High volatility measurements mean higher highs and lower lows, while lower volatility means more level returns. Typically, steady returns have a lower potential for significant gains as investors are often willing to give up high potential returns for increased stability. Since 2013, cryptocurrencies have had weekly volatility four times higher than stocks and 26 times higher than bonds.

For assets as volatile as cryptocurrency, it’s essential to limit your overall exposure. This way, a gain in the asset improves your portfolio, and a catastrophic loss doesn’t jeopardize it.

Generally, it’s also advisable to limit volatile investments to situations where you are investing for the long term. The logic here is that if there’s a sudden loss in portfolio value that you’ll need in the near future (think five years or less, some say 10 years), your portfolio might not ever recover from the loss.

Cryptocurrency vs. Stocks

Cryptocurrencies first came about in 2009 with the advent of Bitcoin. Comparatively, the first stock exchange was formed in 1611 in Amsterdam; in the U.S., the Philadelphia Stock Exchange was founded in 1790. With stock exchanges in the U.S. almost as old as the nation itself, there’s been plenty of time to build up systems and regulations to protect investors and put in safeguards to ensure a well-functioning market.

Splashy headlines of illegal activity, such as hackers making off with $320 million of assets, contribute to cryptocurrency risks. Aside from defrauding individuals, these events can damage investor confidence, causing other investors to curtail further investment in the assets. A famous early hack in 2011 dropped the value of Bitcoin by 94%.

However, fraud as a percentage of total transactions has decreased over time and is estimated to be 0.15% of total crypto value transacted, a small overall percentage. The same authorities regulate cryptocurrencies and the stock market. Today, cryptocurrencies are already worth a massive $1.9 trillion, indicating investor acceptance and comfort with the space. Arguably, some of the most significant asset gains are behind cryptocurrency from its earliest days, with the trade-off being more legitimacy, investor confidence and safeguards.

View the comparison chart below to explore differences between cryptocurrency and stock returns, market size, risk measures and regulation.

Stock vs. Cryptocurrency: Key Differences
Cryptocurrency
Stocks

5-Year Annualized
Return

94.4%

15.7%

Market Cap

$1.9 trillion

$40 Trillion

Weekly Volatility

12.3%

2.0%

Biggest Single
Week Loss from
2013 to Jan. 2022

-39.50%

-14.98%

Regulation

  • Investigated by the Securities and
    Exchange Commission (SEC)
  • Often regulated under “money transmitter”
    laws, which vary from state to state
  • SEC oversees the stock exchanges,
    options markets and options exchanges
    as well as all other electronic exchanges
    and electronic securities markets
  • More institutional oversight and controls
    because exchanges are based in the U.S.

Analysis Shows Increasing Correlation Between Cryptocurrency & Stocks

In 2018, the National Bureau of Economic Research published a paper, "Risks and Returns of Cryptocurrency." The authors concluded that the risk-return dynamics of cryptocurrencies (Bitcoin, Ripple, and Ethereum) were distinct from those of stocks, currencies, and precious metals. Essentially, they found that the change in the value of an asset like stocks didn’t mirror the changes of value of cryptocurrencies and vice versa.

“Cryptocurrencies,” the authors added, “have no exposure to most common stock market and macroeconomic factors.”

This is an important statement for investors as they think about their overall investment portfolio strategy. If an asset’s changes in value are moving with another investment, these two assets don’t offer investors protection in the event of a downturn. Instead, you’d prefer your assets not to be correlated so that if one of them falls, the other one isn’t necessarily falling, too. This statement indicates that, at the time, cryptocurrencies weren’t correlated to stocks and other assets, making them a way to buffer stock market losses or for the stock market to buffer cryptocurrency losses.

However, much has changed in the fast-moving world of cryptocurrencies, including their correlation with the stock market. MoneyGeek’s analysis of cryptocurrency and stock returns found that the correlation between stocks and cryptocurrency has been increasing since 2020.

Increasing correlation to stocks would mean cryptocurrencies writ large are viewed as investment and speculation assets, rather than a traditional currency such as the U.S. dollar or even a traditional store of value, like gold. This shift has implications for how people view and utilize cryptocurrencies in their daily lives and investment portfolios. However, it’s still unclear how the relationship between cryptocurrencies and stocks will evolve over time.

Line graph demonstrating an increasing correlation between cryptocurrency and stocks

Expert Insights

MoneyGeek consulted financial experts to see how they felt about cryptocurrency as an investment vehicle, as well as its place in a retirement savings plan.

  1. For a person saving for retirement, what is the most you think they should be investing in cryptocurrency?
  2. Is cryptocurrency an investment vehicle, or is it something else? How should investors view cryptocurrencies?
David Dubofsky, Ph.D., CFA
David Dubofsky, Ph.D., CFABook Author at Your Total Wealth
Thomas Gilbert
Thomas GilbertProfessor of Finance at the Foster School of Business, University of Washington
Todd Feldman, Ph.D.
Todd Feldman, Ph.D.Professor at San Francisco State University
Eric Kottke
Eric KottkeHigh-Performance Life, Business and Investment Futurist at Eric Kottke Coaching and Fund Manager at Isaiah Blue Asset Management
Jimmy Bisharat
Jimmy BisharatInvestment Advisor Representative at Gerber Kawasaki Wealth & Investment Management
Richard Archer, CFA, CFP, MBA, CDAA
Richard Archer, CFA, CFP, MBA, CDAAPresident at Archer Investment Management
Reilly White, Ph.D.
Reilly White, Ph.D.Associate Professor of Finance at the University of New Mexico
Angelo DeCandia
Angelo DeCandiaInstructor at Touro University
Salil K. Sarkar, Ph.D., CFA
Salil K. Sarkar, Ph.D., CFAProfessor of Finance, Coordinator, Doctoral Finance Program at The University of Texas at Arlington
Scott Kyle
Scott KyleCEO and Chief Investment Officer at Coastwise Capital Group, LLC
Paul J McCarthy III
Paul J McCarthy IIIPresident at Kisco Capital
Yaseen Alhaj-Yaseen, Ph.D.
Yaseen Alhaj-Yaseen, Ph.D.Associate Professor of Finance at Middle Georgia State University
Alexander Fleiss
Alexander FleissChairman and Chief Investment Officer at Rebellion Research Partners
Xi Bai, DBA, CFS, CAS
Xi Bai, DBA, CFS, CASAssociate Professor of Finance and Accounting, Director of Financial Planning
Jeremy Britton
Jeremy BrittonCo-founder & CFO at BostonTrading.co
John Sedunov, PhD
John Sedunov, PhDProfessor of Finance and Real Estate at Villanova School of Business, Villanova University
Dan Kresh, CFP®
Dan Kresh, CFP®Financial Advisor at Creative Wealth Management, LLC
Melanie Musson
Melanie MussonHome Insurance Expert with USInsuranceAgents.com
J. J. Wenrich, CFP®
J. J. Wenrich, CFP®President and Founder of Wenrich Wealth
Greg Welborn
Greg WelbornFounding Principal at First Financial Consulting
William Rice
William RiceFounder of CryptoBuxx
Jack Riashi, Jr., CFP®
Jack Riashi, Jr., CFP®Financial Advisor at Bloom Advisors
Anthony Saffer
Anthony SafferCertified Financial Planner (CFP) at One Degree Advisors
Scott Deacle
Scott DeacleAssociate Professor of Business and Economics and Department Chair at Ursinus College
Jesse Hurst, CFP®, AIF®
Jesse Hurst, CFP®, AIF®Founder of Impel Wealth Management
Matt Elliott
Matt ElliottCFP®, CSLP®, Founder of Pulse Financial Planning
Moshe Bellows
Moshe BellowsManaging Principal of Maccabee Ventures
Siyu Wang
Siyu WangBehavioral Economist
Anurag Wakhlu
Anurag WakhluAdjunct Finance Professor at Bentley University
Will Delavan
Will DelavanAssociate Professor of Economics
Troy Wiipongwii
Troy WiipongwiiAffiliated Faculty, William & Mary Global Research Institute/ Governor, Harmony Sustainable Development DAO
Josh Simpson
Josh SimpsonInvestment and Financial Advisor at Lake Advisory Group

Methodology

MoneyGeek’s cryptocurrency index was constructed using a market cap weighting of weekly cryptocurrency from April 28, 2013, through February 6, 2022, as reported by CoinMarketCap. Each week, the index is reconstructed to reflect changes in the relative weights of the coins in the index.

We utilized weekly returns of the S&P 500 to reflect stocks; to reflect the return on bonds, the S&P US Aggregate Bond Index was used.

Disclaimer: The information provided on this page is only for educational purposes. MoneyGeek doesn’t recommend that investors buy or sell any particular investments, nor does it offer any financial advisory services.

About Geoff Williams

Geoff Williams headshot

Geoff Williams has been a professional writer for over three decades and a personal finance journalist for over 15 years. He contributes financial content to MoneyGeek, with expertise in personal finance, real estate, entrepreneurship, credit cards and loans. He has been writing for various publications, including The Wall Street Journal, The Washington Post and CNNMoney. He also authored several books, including “Living Well with Bad Credit.”

Williams earned his creative writing degree from Indiana University Bloomington.

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