Bitcoin prices surged in 2024, making it the top-performing investment of the year. With prices soaring about 125%, ending the year around $94,000 after starting in the $40,000 range, many investors were drawn to the cryptocurrency. However, financial experts advise caution when considering investing in bitcoin or other cryptocurrencies.

Experts recommend that bitcoin should generally only account for a small portion of an investor’s portfolio, usually no more than 5%. Due to its extreme volatility, having a smaller allocation in bitcoin can have a similar impact on a portfolio as traditional assets like stocks and bonds. Ivory Johnson, a certified financial planner and founder of Delancey Wealth Management, emphasized the importance of balancing risk when investing in bitcoin.

The surge in bitcoin prices in 2024 was attributed to various factors, including the expectation of deregulatory policies under Donald Trump’s U.S. presidential administration. Additionally, the Securities and Exchange Commission approved exchange-traded funds that invest directly in bitcoin and ether, making it easier for retail investors to access cryptocurrencies.

Despite the potential for high returns, experts warn of the underlying risks associated with investing in bitcoin. Amy Arnott, a portfolio strategist for Morningstar Research Services, highlighted the extreme volatility of bitcoin compared to traditional assets like U.S. stocks. She recommended a portfolio allocation of 5% or less to cryptocurrencies, with some investors opting to avoid them altogether.

BlackRock, a prominent money manager, suggested that a 1% to 2% allocation to bitcoin is a reasonable range for investors who are comfortable with the risk and believe in its potential for wider adoption. Going beyond this range could significantly increase the risk associated with bitcoin in a portfolio.

On the other hand, Vanguard, another asset manager, does not currently offer a crypto ETF or have plans to do so, as they view crypto as more of a speculation than an investment. Janel Jackson, Vanguard’s former global head of ETF Capital Markets, highlighted the immaturity of the asset class and its lack of inherent economic value.

Financial advisors recommend a dollar-cost averaging strategy for investors interested in buying into crypto. This involves purchasing small amounts of bitcoin over time until reaching a target risk level. Ultimately, the decision to invest in bitcoin should align with an investor’s risk tolerance and long-term financial goals. While bitcoin can be a valuable addition to a diversified portfolio, it is essential to approach it cautiously and be prepared for its volatile nature. Investing in cryptocurrency can be a risky endeavor, with prices often experiencing sudden and drastic fluctuations. This is why financial experts like Johnson recommend a more cautious approach, such as not putting a large percentage of your investment all at once. By spreading out your investments over time, you can reduce the risk of losing a significant amount of money if the market takes a downturn.

In addition to spreading out your investments, it’s also wise to adopt a long-term mindset when it comes to cryptocurrency. Just like with traditional financial assets, holding onto your cryptocurrency for an extended period can help you weather the ups and downs of the market. According to Morningstar, it’s recommended to hold onto your cryptocurrency for at least 10 years to maximize your potential returns.

By following these strategies, investors can better protect their investments and increase their chances of seeing positive returns in the long run. While the cryptocurrency market can be volatile, taking a cautious and long-term approach can help investors navigate the uncertainties and come out ahead in the end.