How cryptocurrencies fit into a diversified investment portfolio

Some lofty claims have been made about cryptocurrencies, including that they will replace government-issued currencies, be as revolutionary as smartphones, and democratize the financial system. However, most investors cite diversifying their investment portfolios as a very common reason for holding digital assets.

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

Advisers say diversification is a key aspect of a healthy portfolio. At higher levels, it helps reduce investment risk.

Almost half (45%) of crypto investors say diversification is the main reason for holding their assets, according to a report released this month by think tank Urban Institute.

In fact, investors’ biggest motivation was diversification.

Among other reasons, 27% of investors said they believed cryptocurrencies were the future, 11% said they could make more money with cryptocurrencies than other investments, and 5% said they didn’t trust the U.S. dollar, according to the Urban Survey, which surveyed 3,194 U.S. adults in January. This defines a cryptocurrency owner as someone who reports owning cryptocurrencies such as Bitcoin, Solana, Ethereum, XRP, stablecoins, memecoins, and other digital coins.

The findings suggest that investors are turning to cryptocurrencies as part of a more traditional investment strategy, but experts said that in the early years of cryptocurrencies’ nearly two-decade existence, investors primarily viewed them as countercultural and non-conformist.

“As cryptocurrencies become more widely integrated into mainstream financial markets and become just another asset, it stands to reason that they will become detached from the anti-establishment views that drove their early adopters,” said Dan Cassino, a political science professor at Fairleigh Dickinson University and author of “Bitcoin Brothers: Masculinity, Cryptocurrency, and the Future of Men.”

Overall, it’s a good sign that people are thinking about cryptocurrencies from an investment perspective, said Douglas Bonepers, a certified financial planner and president and founder of Born Fied Wealth in New York.

“When the primary motivation shifts from ideology and speculation to portfolio construction, that’s a sign of maturity,” said Vaughan Peirce, who is also a member of the CNBC Financial Advisors Council.

However, how effective cryptocurrencies are as an asset diversification “depends entirely on the quality of execution,” he said.

There are many ways to diversify your investment portfolio.

For example, investors can diversify their asset classes by owning a mix of stocks, bonds, cash, commodities, cryptocurrencies, and more. You can also diversify within asset classes, such as owning both U.S. and international stocks.

The basic premise is that assets move up and down independently of each other, rather than moving in tandem, said Veronica Willis, senior investment strategist in the asset allocation team at Wells Fargo Investment Institute.

That way, if stock prices decline, investors can use other asset classes as ballast.

Bonds are a traditional way to diversify from stocks. Over the past decade, bonds have had a low correlation with U.S. stocks, with a correlation of 0.02 with the S&P 500 index, Willis said.

A correlation of 1 means the assets move perfectly together, meaning there is no diversification benefit. A zero correlation means there is no relationship, and a negative correlation means they move in opposite directions.

Meanwhile, the correlation between digital assets and the S&P 500 over the past 10 years is 0.2, Willis said. That’s higher than bonds, but still “very low,” he said.

“Cryptocurrencies tend to provide diversification, so they can be complementary to traditional investments over the long term,” said Jim Ferraioli, director of crypto research and strategy at the Schwab Center for Financial Research.

Bitcoin in particular is “earning its place in portfolios for diversification reasons,” Bonepers said.

Bonepers said the company “has a very different return history than stocks or bonds over the long term.” “This is a meaningful addition for investors who are thinking about currency depreciation, geopolitical instability, or who simply want an asset with different fundamental factors.”

Experts said investors turning to cryptocurrencies for diversification should be prepared for volatility. During some economic downturns, the entire portfolio could show red, they said.

“The correlation between Bitcoin and stocks tends to spike during periods of severe market stress, when investors sell whatever is liquid,” Bonepers said. “So the benefits of diversification are real, but not unconditional.”

Willis said that because digital assets are a “hybrid” of diversifying and growth assets, cryptocurrencies tend to move with stocks during overall market declines. He said growth assets tend to have higher investment returns, but also higher risk.

She said that while not all types of cryptocurrencies necessarily move in tandem with Bitcoin, Bitcoin is the main driver of returns for this asset class because it has the largest market share.

“As investors start to get a little bit scared and start exiting risk-on assets, you’re going to see crypto become part of that,” Willis said.

In other words, don’t rely on cryptocurrencies as your only means of diversification, she said.

Experts say the correlation may also change over time. “Assets that were once great diversifiers may no longer be so,” Morningstar portfolio strategist Amy Arnott wrote in a May 2025 article.

For example, over the 10-year period ending April 30, 2025, Bitcoin and other “major cryptocurrencies” had a correlation of less than 0.4 with stocks, bonds, real estate, gold, commodities, and other asset types, Arnott wrote. However, Bitcoin’s correlation with U.S. stocks for the subsequent three years ending in April 2025 was 0.55, he wrote, whereas in some previous periods the correlation figure was close to zero or even below zero.

Allocation to cryptocurrencies is an important factor, Bonepers said. Many financial advisors say that investing 1% to 2% in digital assets is a good allocation.

“Above 5%, Bitcoin volatility could start to dominate the risk profile of the entire portfolio,” Vonepers said. “At that point, it stops acting as a diversifying vehicle and starts acting as a primary bet.”

Willis said he recommends allocating around 2% to 3% to cryptocurrencies. Still, she said she only recommends it to investors whose investment goal is primarily growth, rather than conservative investors looking for income, for example.

He said a small allocation can cushion the impact of overall risk and volatility.

“If you are a long-term investor, we think[digital assets]can add attractive diversification,” Willis said. “But that doesn’t erase the fact that it’s a highly volatile asset.”