How crypto fits into a diversified investment portfolio

There have been lofty claims made about cryptocurrency in the past, including that it will replace government-issued money, prove to be the foundation of smart phones and democratize the financial system. But many investors point to a common reason for holding digital assets: diversifying their investment portfolio.

The catch: There’s a right way and a wrong way to use digital assets like bitcoin for diversification, say financial advisors and market analysts.

Diversification is a key element of a sound portfolio, advisers say. At a high level, it helps reduce investment risk.

Almost half of crypto investors – 45% – say diversification is the main reason for holding the asset, according to a report published this month by the Urban Institute, a think tank.

In fact, diversification was the No. 1 investor motivator, according to the report.

Among other reasons, 27% of investors said they believe crypto is the future, 11% said they would make more money in crypto than other currencies, and 5% said they don’t trust the US dollar, according to Urban, which surveyed 3,194 US adults in January. It defines crypto owners as those who report ownership of cryptocurrency such as bitcoin, solana, ethereum, XRP, stablecoins, memecoins and other digital coins.

The findings suggest that investors are looking at crypto as part of a traditional investment strategy, whereas in the earlier days of its nearly ten-year existence, investors viewed it as counter-cultural and unconventional, experts said.

“As crypto becomes more integrated into the mainstream financial markets, and becomes just another asset, it makes sense that it will be separated from the anti-establishment views that drove the early guardians away,” said Dan Cassino, professor of political science at Fairleigh Dickinson University and author of “Bitcoin Bros: Manhood, the Future of Cryptocurrency.”

Overall, it’s a good sign that people are thinking of cryptocurrency in terms of investment, said Douglas Boneparth, certified financial planner and president and founder of Bone Fide Wealth in New York.

“When the primary motivation goes from an idea or a guess to building a portfolio, that’s a sign of maturity,” said Boneparth, who is also a member of CNBC’s Financial Council.

However, how well crypto can work as a diversified asset “depends entirely on the quality of the transaction,” he said.

There are different ways to diversify an investment portfolio.

For example, investors can diversify between asset classes by having a mix of stocks, bonds, cash, commodities and crypto, among others. They can also diversify within asset classes, such as holding both US stocks and international stocks.

The basic premise is to own assets that don’t move in tandem, but instead move up and down independently, said Veronica Willis, chief investment strategist in the asset allocation team at Wells Fargo Investment Institute.

That way, when stocks go down, investors can rely on other asset classes to act as ballast.

Bonds are a common way to diversify away from stocks. Over the past 10 years, bonds have shown a low correlation to US stocks, with a correlation of 0.02 to the S&P 500 index, Willis said.

An Aa correlation of 1 means that the assets are moving in perfect sync – meaning there is no diversification benefit. A zero correlation means there is no relationship, while a negative correlation means they move in opposite directions.

Meanwhile, digital assets have a 0.2 correlation with the S&P 500 over the past decade, Willis said. That’s higher than bonds but “still very low,” he said.

“Cryptocurrency tends to be a diversifier, so in the long run it can be a good complement to traditional investments,” said Jim Ferraioli, director of crypto research and strategy at the Schwab Center for Financial Research.

Boneparth said bitcoin, in particular, “finds its place in the portfolio for diversification reasons.”

“It has a really different return history than stocks and bonds over the long term,” Boneparth said. “For investors thinking about devaluation, geopolitical instability or just looking for an asset with different key drivers, that’s a logical combination.”

Investors turning to cryptocurrency for diversification need to be prepared for volatility, experts say. During a certain downturn, you may see red in your entire portfolio, they say.

“The correlation between bitcoin and equity tends to rise during periods of extreme market stress, when investors are selling anything liquid,” Boneparth said. “Therefore, the diversity benefit is real but not conditional.”

Crypto tends to move with stocks during broader market selloffs because digital assets are a “hybrid” between diversified assets and growth assets, Willis said. Growth assets tend to have the highest return on investment potential but also have the highest risk, he said.

While not all cryptocurrencies are in line with bitcoin, it is the main driver of the asset class’ gains as it has the largest market share, he said.

“When investors start to get a little nervous, and dump their risk assets, crypto meets that,” Willis said.

In short: Don’t rely on crypto as your only differentiator, he said.

The connection can change over time, experts say. “The assets that were once the best hybrids may be gone,” Amy Arnott, Morningstar’s portfolio strategist, wrote in a May 2025 article.

For example, in the 10 years to April 30, 2025, bitcoin and other “major crypto currencies” had a correlation of less than 0.4 relative to stocks, bonds, real estate, gold, commodities, and other types of assets, Arnott wrote. However, bitcoin had a correlation of 0.55 when measured against US stocks for the next three-year period ending in April 2025, from correlation numbers close to zero or even below zero in other periods, he wrote.

Your stake in cryptocurrencies is an important factor, says Boneparth. Many financial advisors say that a 1% to 2% investment in digital assets is a good allocation.

“Above 5%, bitcoin volatility can start to dominate the portfolio’s risk profile,” Boneparth said. “At that point it stops working as a diversifier and starts working as a main bet.”

Willis said he recommends giving away about 2% to 3% of crypto. Even then, he said, he recommends it more to investors whose only investment goal is growth, compared to conservative investors looking for cash, for example.

Smaller allocations exacerbate the risk and impact of volatility, he said.

“If you’re a long-term investor, we think so [digital assets] it can add some attractive diversification benefits,” Willis said. “But that doesn’t take away from being a very versatile asset.”