How to Invest in Crypto for the Long Term
At Stash, we believe that investing a small amount in crypto for the long term can help diversify your portfolio and provide exposure to this new and growing technology without dramatically increasing your overall risk. We realize the price of crypto may continue to fluctuate as market conditions change; however, we’re here to help you invest with confidence and guide you every step of the way.
As of August 2022, the crypto market is in what we call a “crypto winter.” This term is used to describe the periods of substantial selloffs that the industry has witnessed. The longest and most dramatic took place in 2017-2018. There was also a sharp, but relatively short, selloff in early 2021. The current selloff began in late 2021, and most cryptocurrency has been down 60-80% since then1. While it’s unclear how much longer or deeper this sell-off will last, Stash believes an economy with numerous applications and use cases will develop based off of crypto and blockchain technologies. As a result, we believe investing a small percentage of your portfolio in crypto provides an opportunity to invest in this future economy. We added crypto at Stash, so we can give the tools and framework you need for long-term crypto investments.
This article is geared towards how crypto fits into The Stash Way® and addresses how we recommend investing in crypto and some of the risks associated with it. Remember, The Stash Way® has three core principles: build a diversified portfolio, focus on the long term, and make regular investments. To learn more about The Stash Way®, click here.
Why is diversification important?
One of The Stash Way® pillars is to invest in a diversified portfolio. Our advice? Don’t put all of your eggs in one basket; instead, you should invest in a variety of assets that are not highly correlated. Basically, correlation is a fancy way of saying how two things move together. It’s a statistic that ranges from -1.0 to +1.0. When two things are positively correlated, it means they move in the same direction. When one goes up, the other goes up. And when one goes down, the other goes down. When things are negatively correlated, it means that they move in the opposite direction. When they are not correlated (e.g, a correlation of around 0), it means the movement of one has no impact on the other.
The key is to choose a portfolio of securities that have low or negative correlations. We realize there’s some complicated math behind this, but your portfolio will be less risky than one with a handful of securities that move in the same direction. Over time, this can enable an investor to generate returns while taking on lower risk overall.
Historically, certain asset classes have shown low or negative correlations with each other. For example, stocks and bonds have typically had low or negative correlations. However, correlations are not constant over time. For example, correlations fluctuate based on macro factors such as how fast the economy is growing and the inflation rate. Additionally, during times of stress, short-term correlations can rise. During these short periods of higher correlations, investors may feel like all of the assets in their diversified portfolios are going down at the same time. Unfortunately, even a well-crafted portfolio that is designed to reduce risk will not hold up well in these environments. However, they still tend to do better than highly concentrated portfolios. The good news is that these periods of high correlations don’t last forever; and as a long-term investor, it is better to hold a diversified portfolio.
Are cryptocurrencies diversifying assets?
In order to determine whether crypto (as an asset class) will provide incremental benefits to a diversified portfolio, it’s important to know if crypto is correlated to other asset classes. Unfortunately, crypto is a new asset class, and there isn’t a lot of price history. For example, Bitcoin was first launched in 2009, and crypto has only been investable in the last few years. Typically, investors would look at many years of data to determine correlations and that doesn’t exist in the case of crypto.
With this limited data, we’ve looked at how Bitcoin has behaved over the past several years. For the five-year period ending in 2021, Bitcoin showed low daily price change correlations from 2017-2021 to both the US equity markets and the US aggregate bond market. However, as markets have fallen in 2022, and the crypto market has fallen significantly, Bitcoin has become more correlated to the US equity market in the first half of 2022. This is one of those stress periods mentioned above where all asset classes show high correlations with each other. While the correlation of Bitcoin (and other cryptocurrencies) to the US equity market has risen in the recent downturn, the correlations are low enough to provide some further diversification benefits2.
More importantly, Stash believes crypto (as an asset class) will prove to have low correlations to other asset classes over the long term. Coupled with its high potential for long-term growth, crypto is an appealing addition to a long-term investment portfolio. We believe that adding a small amount of crypto to a diversified portfolio, can improve the long-term potential of risk adjusted returns.
Should I invest in crypto and, if so, how much?
While we strongly believe that a small amount of crypto exposure in a diversified portfolio is appropriate for long-term investors, it’s still a personal choice. We recognize that some may not believe in the long-term viability of crypto (which includes many brilliant investors); as an alternative, there are several other investment ideas to help diversify your portfolio. Please see Diversification Analysis for some ideas.
Others may like the idea of having small exposure to crypto, but they aren’t sure which coins to invest in. Others may feel crypto is too volatile. For those of you that are worried about crypto’s volatility or aren’t interested in picking your own crypto investments, we have you covered. Smart Portfolio is the ideal solution. Smart Portfolios are managed by Stash and offer exposure to Bitcoin and Ethereum (through trusts managed by a third party). Smart Portfolio will make automated, regular investments for you and help you invest The Stash Way®. It’s an easy way to build wealth over the long term. You can check out your Smart Portfolio here.
However, if you believe in the long-term potential of cryptos and are interested in doing your own research on individual coins, then direct crypto investing may be for you. If so, we recommend not investing more than 2% of your overall portfolio in any one coin. It’s also important to limit your overall crypto exposure to roughly 5% (based on your risk profile). Please check out the Stash Crypto Calculator before making a purchase to ensure you don’t become overexposed to crypto.
Additionally, remember that investing in crypto should only be done over the long term. It may take many years to see the full potential of crypto play out. All investing involves some degree of risk, and due to it being a new investment class, investing in crypto has a heightened risk. It’s important to only invest what you can afford to lose.
How did Stash choose the cryptos available for investment?
As the crypto ecosystem is new and many cryptocurrencies are young, it is difficult to say which coins will be the most successful. At Stash, we cannot eliminate the risk involved in the overall cryptocurrency market nor can we eliminate the possibility that any cryptocurrency may fail. Instead, we tried to mitigate these risks by only including the largest, more established cryptocurrencies (and excluding cryptocurrencies that might be more susceptible to price manipulations or do not promise long-term use cases). As a result, there are only a handful of coins available for investment on Stash.
Even though these coins are among the most established ones, they still may involve some risk. In fact, the possibility of investment loss is very real and substantial. That is why it is critically important to learn about each crypto before investing and determine if the investment case makes sense to you. If you do decide to invest, we strongly advise limiting your overall exposure in cryptocurrencies to roughly 5% (depending on your risk profile) of your overall investment portfolio and no more than 2% in any one coin.
1Source: CNBC.com, July 2022
2Based on Stash’s Investment Team Research, 2022