Bitcoin and Ethereum’s Role in Your Investment Portfolio (And How Much to Allocate Without Overdoing It)

In the ever-evolving digital finance landscape, two names stand out consistently: Bitcoin and Ethereum. These two titans are not just cryptocurrencies; they are at the forefront of a financial evolution, and throughout the years, they have shifted from niche experiments into major assets that impact global markets.

While there’s been a long debate about which of the two assets is best, Ethereum and Bitcoin aren’t necessarily competitors. Rather, they are a dynamic duo, each with its unique set of use cases and capabilities. It’s, therefore, no wonder that the eth/btc trading pair is the most watched: putting your money into these two digital currencies might be the wisest decision you make to secure your financial future.

Quick Introduction to Bitcoin and Ethereum

Let’s first start with Bitcoin, the crypto king that couldn’t yet be dethroned by any other crypto, even though thousands of them have emerged. Satoshi Nakamoto introduced Bitcoin in 2009, aiming to challenge traditional fiat currencies and offer a decentralized solution. It was, in short, born out of the 2008 financial crisis, enabling transactions without a middleman.

On the other hand, Ethereum is the most popular altcoin, created by Vitalik Buterin and launched in 2015. Compared to Bitcoin, it was made to be more than a cryptocurrency: it’s a programmable blockchain platform supporting dApps and smart contracts. The purpose behind the creation of Ethereum was to overcome the limitations of Bitcoin by offering a more versatile and flexible platform where developers could easily build a range of applications beyond simple transactions.

Unlocking The Potential of Bitcoin and Ethereum in Your Investment Portfolio

Because Bitcoin and Ethereum have low correlation with other asset classes, adding them to your investment portfolio can help smooth out performance and offer a more balanced mix of assets. Despite its obvious importance, portfolio diversification is commonly overlooked, and beginners in particular are the ones who make this mistake. You see, calculating your moves isn’t something to get lauded for, although it is something that any successful investor will do. At its core, portfolio diversification is a strategy that helps mitigate risk by investing in various types of assets that aren’t closely related. This is because if one investment flops, the others are likely to remain afloat and even generate gains to offset the losses from the failed investment.

Plus, Bitcoin and Ethereum’s growth potential is huge, and they have well proved it over the past few years (after all, they are listed everywhere as the two biggest cryptocurrencies). So, if you are patient enough and approach profit-taking smartly, you could see your investment portfolio growing steadily. Another thing that makes Ethereum and Bitcoin a great addition to an investment portfolio is their very nature, which allows them to act as a safe haven for investors, especially in times of economic turmoil and geopolitical instability. Compared to traditional assets such as bonds and stocks, which can lose value quickly, Bitcoin and Ethereum are resilient and can protect your wealth from market uncertainties (which are essentially impossible to avoid).  

And beyond their financial benefits, adding Bitcoin and Ethereum to your investment portfolio is also a way to participate in a technological revolution. All of these are good enough reasons to put your money into these two giants. Note, however, that besides Ethereum and Bitcoin, it’s wise to consider less-established coins as well, so that the performance of your portfolio won’t rely too heavily on these two giants.

How Much Should You Allocate to Cryptocurrencies: Important Considerations

Let us get one thing clear from the beginning: there’s no fast and hard rule when it comes to the percentage you should allocate to cryptocurrencies. Before asking how much to invest in digital currencies, you should take a step back and consider your overall financial situation to determine what your personal “safe” number is. This depends on various factors, including:

• Current investments;
• Monthly savings rate and income;
• Age and retirement goals;
• Risk tolerance;
• Emergency funds.

For instance, it doesn’t make sense for someone who doesn’t have any emergency savings and is on a tight budget to treat cryptocurrency as a core asset. However, if you have experience in investing and a stable income, you may want to allocate more into this asset class. Here’s an example of the suggested crypto allocation based on the individual’s profile:

• Living paycheck to paycheck: between 0 and 1%;
• Basic savings and no debt: between 1 to 3%;
• Stable income, and some investment experience: 3-5%;
• Diversified investor with high-risk tolerance: 5-10%+.

Before jumping into allocating too much into crypto, ask yourself: “How much am I willing to lose without harming the quality of my life”? This will help you identify your limit, which isn’t the maximum you can invest, but rather, the amount that’s safe for you.

There are instances when investors go overboard and invest more than they should, so you may be wondering what the red flags are that indicate it’s too much. Well, let’s just say that if you’re dipping into your emergency fund or feel anxious about every market move, something’s definitely not right, and it’s time to pause and reassess your current circumstances. Remember, there’s a reason why most financial advisors suggest keeping your crypto allocation below 10% of your overall assets: even 5% can be a stretch for some.

The Bottom Line

It’s clear that Ethereum and Bitcoin are both fantastic in their own way. While Bitcoin is more liquid than Ethereum and has a lower coin supply, Ethereum offers better technology and many more use cases. Not only can they live side-by-side in the market, but they also make a great duo, and adding them to your investment portfolio can offer huge financial benefits.

But since they are also volatile and therefore risky, it’s of the utmost importance to be smart about your allocation. As discussed above, consider your personal circumstances and invest only as much as you can afford to lose.