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There have been some lofty claims made about cryptocurrency in the past, including that it will replace government-issued money, prove as groundbreaking as the smart phone and democratize the financial system. But most investors point to a fairly ordinary reason for holding the digital assets: to diversify their investment portfolio.
The catch: There’s a right way and a wrong way to use digital assets such as bitcoin for diversification, financial advisors and market analysts said.
Diversification is an important facet of a sound portfolio, advisors said. At a high level, it helps reduce investment risk.
Nearly half of crypto investors — 45% — say diversification is the primary reason they hold the asset, according to a report published this month by the Urban Institute, a think tank.
In fact, diversification was investors’ No. 1 motivator, according to the report.
In other reasons, 27% of the investors said they believe crypto is the future, 11% said they would make more money in crypto than other investments, and 5% said they don’t trust the U.S. dollar, according to Urban, which surveyed 3,194 U.S. adults in January. It defines crypto owners as those who report owning cryptocurrency such as bitcoin, solana, ethereum, XRP, stablecoins, memecoins and other digital coins.
The findings suggest that investors are looking to crypto as part of a more traditional investment strategy, whereas in the earlier days of its roughly two-decade existence, investors largely held it to be countercultural and nonconformist, experts said.
“As crypto gets more widely integrated into mainstream financial markets, and becomes just another asset, it makes sense that it’ll be separated from the anti-establishment views that drove early adopters,” said Dan Cassino, a professor of political science at Fairleigh Dickinson University and the author of “Bitcoin Bros: Masculinity, Cryptocurrency, and the Future of Men.”
Overall, it’s a good sign that people are thinking of cryptocurrency in investment terms, said Douglas Boneparth, a certified financial planner and president and founder of Bone Fide Wealth in New York.
“When the primary motivation moves from ideology or speculation toward portfolio construction, that’s a sign of maturation,” said Boneparth, who is also a member of the CNBC Financial Advisor Council.
However, just how effective crypto can be as a diversifying asset “depends entirely on the quality of the execution,” he said.
‘A good complement’ to traditional investments
There are different ways to diversify an investment portfolio.
For example, investors can diversify between asset classes by owning a mix of stocks, bonds, cash, commodities and crypto, among others. They can also diversify within asset classes, such as by holding both U.S. stocks and international stocks.
The basic premise is to have assets that don’t move in tandem, but instead move up and down independently of each other, said Veronica Willis, a senior investment strategist on the asset allocation team at Wells Fargo Investment Institute.
That way, when stocks drop, investors can rely on other asset classes to serve as a ballast.
Bonds are a traditional way to diversify away from stocks. Over the past 10 years, bonds have displayed a low correlation to U.S. stocks, with a 0.02 correlation to the S&P 500 stock index, Willis said.
Aa correlation of 1 means the assets move perfectly in tandem — meaning there isn’t a diversification benefit. A correlation of zero means there is no relationship, while a negative correlation means they move in opposite directions.
Meanwhile, digital assets have a correlation of 0.2 with the S&P 500 over the past decade, Willis said. That’s higher than bonds but still “very low,” she said.
“Cryptocurrency tends to be a diversifier, so over the long-term it can be a good complement to more traditional investments,” said Jim Ferraioli, director of crypto research and strategy at the Schwab Center for Financial Research.
Boneparth said bitcoin, in particular, “earns its place in a portfolio on diversification grounds.”
It has “a return history that is genuinely distinct from stocks and bonds over long time horizons,” said Boneparth. “For investors who are thinking about currency debasement, geopolitical instability or simply want an asset with different fundamental drivers, that is a meaningful addition.”
Diversification benefit is not ‘unconditional’
Investors who turn to cryptocurrency for diversification need to be prepared for volatility, experts said. During some downturns, you might see red across your portfolio, they said.
“Correlations between bitcoin and equities tend to spike during periods of acute market stress, when investors sell whatever is liquid,” Boneparth said. “So, the diversification benefit is real but not unconditional.”
Crypto tends to move with stocks during broad market sell-offs because digital assets are a “hybrid” between diversifying assets and growth assets, Willis said. Growth assets tend to have high potential for investment returns but are also high-risk, she said.
While all types of crypto don’t necessarily move in tandem with bitcoin, it’s the primary driver of the asset class’s returns since it has the largest market share, she said.
“When investors start to get spooked a little bit, and get rid of their risk-on assets, crypto gets bundled in with that,” Willis said.
In short: Don’t rely on crypto as your only diversifier, she said.
Correlations can also change over time, experts said. “Assets that were once great diversifiers may no longer be so,” Amy Arnott, a portfolio strategist for Morningstar, wrote in a May 2025 article.
For example, in the 10 years through April 30, 2025, bitcoin and other “major cryptocurrencies” had a correlation of less than 0.4 relative to stocks, bonds, real estate, gold, commodities, and other asset types, Arnott wrote. However, bitcoin had a correlation of 0.55 when measured against U.S. stocks for the trailing three-year period ending in April 2025, up from correlation numbers near zero or even below zero in some previous periods, she wrote.
What is the best crypto allocation?
Your allocation to cryptocurrencies is an important factor, Boneparth said. Many financial advisors say that a 1% to 2% investment in the digital assets is a good allocation.
“Above 5%, bitcoin’s volatility can begin to dominate the portfolio’s overall risk profile,” Boneparth said. “At that point it stops functioning as a diversifier and starts functioning as the primary bet.”
Willis said she recommends a roughly 2% to 3% allocation to crypto. Even then, she said, she largely recommends it only for investors for whom growth is an investment goal, as opposed to more conservative investors who seek income, for example.
Small allocations blunt the overall risk and impact of volatility, she said.
“If you’re a longer-term investor, we think [digital assets] can add some attractive diversification benefits,” Willis said. “But that doesn’t take away from it being a highly volatile asset.”
