Crypto’s Role in Portfolios

Crypto's Role in Portfolios

Happy Thursday, advisors!

In today's "Crypto for Advisors" newsletter, Rusty Vanneman discusses the role of crypto in a portfolio along with factors for advisors to consider regarding investment types.

Then, in "Ask an Expert," Wojciech Kaszycki answers questions about including cryptocurrencies in portfolios.

Happy reading!

– Sarah Morton

How to Use Crypto in Portfolios

Executive Summary

As someone who has worn different hats over the years — chief investment officer, portfolio manager, and head of due diligence for third-party strategies, sometimes all at once — I've seen a wide range of approaches to using cryptocurrencies, particularly bitcoin, in investment portfolios. With the asset class's rapid growth and increasing institutional adoption, every asset and portfolio manager must now answer the same question: How should digital assets fit into a multi-asset allocation?

Mandate clarity and risk discipline are essential — volatility, correlations, and tracking-error risk must all align with what a portfolio promises to deliver.
Direct or indirect exposure can be valid, depending on a manager's expertise and philosophy, but the long-term case for strategic, modest allocations is strengthening.

A New Tool in the Asset-Allocator's Kit

From an allocator's perspective, having a new asset class is exciting. But first things first: Can adding digital assets enhance long-term, risk-adjusted returns? Historically, yes. The forward-looking answer depends on continued market development.

The right approach always depends on a portfolio's mandate. What did the portfolio promise its investors? What outcomes and behaviors should it deliver? Any new asset — including bitcoin — must be evaluated against those commitments.

Correlations, Risk, and Portfolio Roles

For me, the most important characteristic of any asset class is its risk profile — not just in isolation, but in relation to the other assets in the portfolio. Low or declining correlations to traditional stocks and bonds are especially valuable. Bitcoin has shown moments of "risk-on" behavior and moments where it acts as a hedge, but its long-term correlation trend is moving lower. That's appealing.

Given today's vulnerabilities in equities (high valuations) and fixed income (inflation, debt, and credit concerns), any asset with a differentiated return stream deserves serious fiduciary consideration.

Still, mandates matter — and so does volatility. While digital asset volatility has moderated as the market has grown and institutional involvement has deepened, it remains high. That can constrain risk budgets or limit potential position sizes.

Another consideration is tracking-error risk — the degree to which an asset behaves differently from the "TV Benchmarks" like the Dow, S&P 500, and Nasdaq. When an asset significantly diverges from those benchmarks, especially during periods of relative weakness, many investors find it psychologically difficult to hold. This challenge applies to all alternatives, crypto included.

When the groundwork for mandates, expectations, and communication is well laid, digital assets can earn a place in diversified portfolios. They have historically improved outcomes, and I believe they will continue to do so as the market matures.

As for allocation size, my view is that a long-term strategic weight in the low single digits is appropriate for most diversified portfolios — at least until the asset class's volatility moves materially lower, which I expect will happen over time.

Indirect Exposure Still Matters

Some high-quality portfolio managers who believe in the digital asset story choose not to invest directly. Instead, they gain exposure through companies and infrastructure providers positioned to benefit from digital asset adoption. This is a perfectly valid approach — especially when a manager's core strengths lie in equity research and portfolio construction.

Closing

Digital assets are no longer theoretical — they're investable, increasingly institutional, and here to stay. Whether accessed directly or indirectly, they deserve thoughtful consideration within the broader asset-allocation framework.

- Rusty Vanneman, chairman, Advisory Board of Main Management

Ask an Expert

Q: How should advisors manage risks associated with digital assets?

A: Advisors should start with a formal cryptoassets policy that sets clear limits on allocation (e.g., max percentage of portfolio), approved instruments (spot, exchange-traded products, funds), counterparties, and custody standards (e.g., qualified custodians), in line with emerging regulation.

They should run proper risk assessments (market, liquidity, operational, cyber, legal) and use stress tests and scenario analysis specific to crypto's volatility, rather than treating it like a traditional equity sleeve. Finally, ongoing client education and documentation are crucial: explain risks in plain language, document suitability and risk tolerance decisions, and regularly revisit them as regulations and products evolve.

Q: Should diversification among digital assets go beyond blue-chip?

A: In most cases, yes, but only after a solid core in "blue chips" like BTC and ETH, which still anchor most institutional crypto allocations.

Beyond that, limited, clearly risk-aware exposure to selected alt-layers (L1/L2), DeFi, infrastructure tokens, stablecoins, and tokenized real-world assets can improve diversification, as long as liquidity, regulatory, and counterparty risks are acceptable.

Q: What is the importance of active investing in digital assets as opposed to the outdated passive investment formula?

A: In crypto, "set and forget" passive baskets can quickly accumulate dead or delisted tokens, because the technology, regulation, and market structure move faster than traditional equity indices.

Active management (underwriting) assets, such as regulatory changes, tokenomics, and competition, help advisors rotate out of obsolete projects and manage idiosyncratic risk while still using passive tools (ETFs, indices) as building blocks. This doesn't mean daytrading; it means ongoing research, rebalancing, and governance rather than blindly tracking yesterday's index.

Q: What are the key indicators behind a strong digital asset and proper management of investments in the digital landscape?

A: A strong digital asset usually has a clear purpose, proven security, growing real usage (transactions, users), and a sensible, transparent supply structure.

Advisors should check that the asset is sufficiently liquid to enter and exit, and that the issuer or foundation operates in line with basic regulatory and security standards. In portfolios, this translates into simple rules: max position sizes, only liquid assets, and regular reviews to decide whether to keep, add, or exit.

- Wojciech Kaszycki, chief strategy officer, BTCS SA

Keep Reading

New Report: Digital asset adoption in APAC is exponentially outpacing global rates.
Canada gets a stablecoin: QCAD becomes the nation's first compliant stablecoin.
Texas becomes the first U.S. state to buy bitcoin.

CoinDesk Disclosure: The information contained in this newsletter, and any information linked through the items contained herein, is not intended to provide sufficient information to form the basis for an investment decision. You should seek additional information regarding the merits and risks of investing in any cryptocurrency or digital assets.