To lower crypto investment risk, the market is starting to diversify

Volatility is nothing new for crypto investors, and 2025 has been a wild ride, with bitcoin climbing above $125,000 in October before experiencing several sharp drops — peak to trough, a decline of over $40,000 from its record high.

“Crypto is a volatile asset class, and in some sense, there is no avoiding that volatility,” said Zach Pandl, head of research at Grayscale Investments, a digital currency asset management company which runs one of the largest bitcoin ETFs, the Grayscale Bitcoin Trust (GBTC). “It’s an alternative asset class, and we are seeking its particular return characteristics,” he said.

Bitcoin is now trading near $88,000, and whether the next move is up or down, investors in the crypto space need to have what it takes to stomach the volatility. There may be some help — in the form of new market ideas and classic diversification concepts — to cushion portfolios from at least some of crypto’s risk-on nature. These are some of the ideas to consider.

Identify your appropriate portfolio sizing.

The first step is to make sure your crypto position sizing within your portfolio is appropriate. Some financial advisors are going out on a limb and telling investors to hold as much as 40% in crypto. But for most investors, there is a strong case to be made for crypto remaining only a modest part of a broadly diversified portfolio. This can vary by an individual’s age, income, risk profile and other factors, but a good rule of thumb is to allocate no more than 5% of a well-balanced portfolio to crypto. Even so, many investors opt for a smaller allocation, often in the 1% to 3% range. 

Consider dialing down the risk level in your other holdings.

David Siemer, co-founder and chief executive of Wave Digital Assets, an investment advisory firm specializing in digital asset management, emphasized the importance of ensuring the rest of an investor’s portfolio is aligned to help maintain volatility at a comfortable level. That may mean a less heavy tilt to the market’s leading growth stocks across the broader portfolio.

“Because [crypto’s] going to give you either rocket fuel or the opposite, you probably want to be a little heavier on value stocks or bonds, for example,” he said.

Diversify within the crypto asset class.

Bitcoin is the largest digital asset by market capitalization, but there are many others with valuable use cases, Pandl said. Adding exposure within a crypto portfolio to ether and the solana cryptocurrency, for instance, “can be a way to make sure you’re capturing all of these trends in your portfolio,” he said. This approach may improve risk-adjusted returns in the same way diversification improves risk-adjusted returns in other asset classes, Pandl added.

Still, investors need to recognize that other types of crypto are highly correlated to bitcoin, so there’s only so much diversification within crypto itself that’s possible, Siemer said. 

Other advisors caution that many of the non-bitcoin digital assets becoming popular…