Why diversify with crypto?

“Don't put all your eggs in one basket”: this popular piece of advice also applies to finance. Smart investors strive to build diversified portfolios that are made up of a variety of financial products, such as stocks or bonds. Crypto can be an interesting asset to further diversify one’s portfolio - we will explain why, and how, in this article.

A brief history of crypto

“Crypto” refers to digital currencies that rely on cryptography to secure transactions. The first Bitcoin (BTC) was mined, i.e created, in 2009, followed in 2015 by Ethereum (ETH). Bitcoin and Ethereum adoption has grown steadily ever since, as illustrated by the charts below. They show the number of BTC & ETH unique addresses. Also known as wallets, they enable users to make transactions with or store BTC/ETH. As of October 2025, there are over 1,4 billion BTC addresses, and over 250 million ETH addresses, and amongst them, over 54 million BTC addresses and 161 million ETH addresses with a non-zero balance.

Today, there are thousands of cryptocurrencies available on the market. Most investors focus on BTC and ETH, which are considered to be major players in the crypto ecosystem, and are referred to as “blue-chip” coins. BTC in particular is the most popular crypto, with a market capitalization of $2.3 trillion as of October 2025, and it is often the first crypto asset traders invest in.

Why consider adding Bitcoin to your portfolio?

Standard portfolios are losing their edge. The diversification offered by an allocation of 60% stocks and 40% bonds faded in 2022 when both asset classes underperformed, and their correlation rose to 42%, the highest level in over 20 years. This correlation has remained high as monetary policies implemented during the pandemic boosted these assets, and the resulting inflation weighed on their value. To make matters worse, a growing number of investment products trade stocks and bonds simultaneously.

More and more investors are turning to crypto. In this section, we will focus on Bitcoin to explain why.

Bitcoin is a decorrelated asset that will help you diversify your portfolio

Diversification is a way to limit risk by investing in assets that are not fully correlated. Correlation is a statistical measure that tracks how two assets move in relation to each other. Let’s say a trader invests in two assets: A and B. If A and B’s correlation is 100%, it means they are perfectly correlated: their value rises and falls at exactly the same pace. As a result, the investor’s portfolio is not diversified at all: any adverse event affecting A is reflected in B’s value. On the contrary, if A and B’s correlation is -100%, the assets are negatively correlated, and move in opposite directions.

Investors aiming to effectively reduce their risk are looking for assets with as low correlation as possible. This means assets are moving independently from each other, and makes for a diversified portfolio. 

Bitcoin’s correlation to other assets has historically been quite low, as reflected in the chart below.

The Nasdaq 100, an index tracking the stock performance of 100 of the largest non-financial companies in the Nasdaq Composite, is often used as a benchmark. The Bitcoin–Nasdaq relationship has oscillated between negative and positive phases, strengthening during risk-on cycles (2020–2022) and weakening as macro conditions changed (2023–2025). This suggests Bitcoin’s dual identity as both a risk asset and a diversifier depending on the macro environment.

However, Bitcoin’s correlation to traditional assets tends to increase as the asset matures. In addition, Bitcoin can also react to major macroeconomic events, such as interest rate hikes. 

Bitcoin’s volatility is moderating but investors still see opportunity

Those investing in Bitcoin also appreciate its volatility - and are prepared to book a seat in a roller-coaster ride, as shown in the graph below.

Bitcoin’s reputation for wild price swings is evolving. As shown in the chart below, BTC’s volatility has declined significantly since 2018, narrowing the gap with traditional assets such as the Nasdaq, S&P 500, and gold. While Bitcoin remains more volatile than equities or bonds, the difference has steadily decreased, suggesting a maturing asset class that is increasingly influenced by institutional flows and macroeconomic trends.

Historically, Bitcoin has experienced extreme price movements — from $4,000 to $20,000 in just three months in 2017, or from $5,000 to $60,000 within a year during 2020–2021. Today, however, such sharp fluctuations are less frequent. This reflects greater market depth, ETF-driven liquidity, and a growing long-term investor base that helps smooth short-term volatility.

For investors, Bitcoin’s declining volatility may actually enhance its appeal as a portfolio diversifier. Adding a volatile yet decorrelated asset like BTC can improve a portfolio’s risk-adjusted returns, particularly in environments of monetary easing or inflationary pressure.

Optimising a portfolio with a crypto allocation (BTC + selected altcoins)

The study provides an example mix that balances performance with controlled drawdowns (allocation for illustration only and does not constitute investment advice):

This allocation reflects several considerations:

• Bitcoin as the anchor: It remains the most liquid and institutionally adopted digital asset. Bitcoin is the most established and widely adopted digital asset, and for this reason, it is often viewed as the anchor of a crypto allocation. Only a few altcoins have outperformed Bitcoin over time.

• Ethereum for smart contract dominance: Its large ecosystem of decentralized applications justifies a significant allocation. As the second-largest digital asset, Ethereum also has a proven record of 100% uptime and is the most widely supported crypto platform among institutions and developers.

• Solana for speed and scalability: High throughput and low fees make it attractive for stablecoin settlements and DeFi. Despite some challenges in its early days, Solana has since managed to recover and is now widely adopted by institutions and developers.

• XRP for cross-border efficiency: With a strong use case in remittances and payments, XRP remains one of the oldest cryptocurrencies and has built a significant global community of supporters.

This balanced mix reflects a philosophy: Bitcoin as the anchor, with carefully selected altcoins that each contribute specific strengths — programmability, scalability, and payments.

So is 5% the optimal allocation for crypto investment?

This analysis shows 5% was efficient, as it achieved higher returns by slightly increasing risk. But this is only an example: it’s up to investors to build their personalised portfolio, based on the risk level they are comfortable with. The more BTC and or mix of crypto there is in a given portfolio, the riskier it becomes. Diversifying with crypto should therefore be part of a wider strategy, in conjunction with other assets. 

Don't forget to rebalance!

Whatever the chosen percentage, rebalancing is key. Rebalancing is the process of adjusting the allocation of assets within a given portfolio to achieve a preferred level of risk and returns. Concretely, it means that crypto should remain at the predefined weight within the portfolio (5% in our example). 

Should this percentage swing too widely over time, investors will be exposed to more volatility, drawdown, and hence risk, that they had initially forecasted. To prevent this from happening, investors should regularly monitor their portfolios’ performance and buy/sell assets accordingly. 

Diversify with crypto

Thanks to its decorrelation, crypto can be an interesting addition to your portfolio. ​​Based on our simulation, holding 5% of crypto (BTC and selected alts) improved the portfolio’s risk/return trade-off, compared to a “standard” 60/40 stock/bond portfolio. 

However, keep in mind that investing in crypto comes with risks, in particular of volatility and loss of capital.

The easiest way to add crypto to your current portfolio is to invest in crypto ETPs. Crypto ETPs slot straight into your existing investment portfolio, making analysis of your investments and activities like asset rebalancing a straightforward operation. They also free you from the complexity and security risks of self-custody. 

We explain it all in our article outlining why crypto ETPs are the best way to invest in crypto.