Bitcoin Prices have skyrocketed in 2024. But you should be careful before the euphoria leads you into a hasty buying spree.

According to financial experts, Bitcoin and other cryptocurrencies should generally only make up a fraction of investors’ portfolios – generally no more than 5% – due to their extreme volatility.

Some investors might be wise to stay away from it altogether, they said.

“They won’t have the same size allocation as you in Bitcoin Nasdaq or the S&P 500said Ivory Johnson, certified financial planner and founder of Delancey Wealth Management based in Washington, DC

“If you have a really volatile asset class, you need fewer of them in the portfolio to have the same impact” as traditional assets like stocks and bonds, said Johnson, a member of the CNBC Financial Advisor Council.

Bitcoin, the largest cryptocurrency, was by far the best-performing asset in 2024. Prices rose about 125% to end the year at around $94,000 after starting in the $40,000 range.

In comparison, the S&P 500, a US stock index, rose 23%. The Nasdaq, a tech-heavy stock index, grew 29%.

Prices exploded after Donald Trump won the US presidential election. His government is expected to pursue deregulation policies that would boost demand for cryptocurrencies.

Last year, the Securities and Exchange Commission also approved — for the first time — exchange-traded funds that invest directly in Bitcoin and Ether, the second-largest cryptocurrency, making it easier for retail investors to buy cryptocurrencies.

But experts warned that high profits could mask an underlying threat.

“With high returns comes high risk, and crypto is no exception,” Amy Arnott, portfolio strategist at Morningstar Research Services, wrote in June.

Bitcoin has been nearly five times as volatile as U.S. stocks since September 2015, and Ether has been nearly 10 times as volatile, Arnott wrote.

“A portfolio weighting of 5% or less seems reasonable, and many investors may want to avoid cryptocurrencies altogether,” she said.

Bitcoin lost 64% and 74% of its value in 2022 and 2018, respectively.

Mathematically, investors need a 100% return to recover from a 50% loss.

So far, crypto returns have been high enough to offset the additional risk – but it is not a given that the pattern will continue, Arnott said.

There are several reasons for this: Crypto has lost value as a portfolio diversifier as it becomes more mainstream, Arnott wrote. Its popularity among speculative buyers “also makes it vulnerable to price bubbles that eventually burst,” she added.

BlackRock, an asset manager, believes there are good reasons to own Bitcoin in a diversified portfolio, for investors who are familiar with the “risk of potentially rapid price falls” and believe it will become more widespread, write Experts from the BlackRock Investment Institute in early December.

(BlackRock offers a Bitcoin ETF, the iShares Bitcoin Trust, IBIT.)

More from Personal Finance:
Why should you adjust your investments after high stock returns?
Here’s how to get the most out of crypto in 401(k) plans
Target date funds don’t work for everyone

An allocation of 1 to 2% for Bitcoin is a “reasonable range,” BlackRock experts wrote.

Going beyond that would “greatly increase” Bitcoin’s share of a portfolio’s overall risk, they said.

For example, BlackRock estimates that a 2% Bitcoin allocation represents about 5% of the risk of a traditional 60/40 portfolio. But a 4% allocation increases that to 14% of total portfolio risk, it said.

In comparison, Vanguard, another asset manager, currently has no plans to launch a crypto ETF or offer one on its brokerage platform, officials said.

“Vanguard’s view is that crypto is more of a speculation than an investment,” Janel Jackson, former global head of ETF Capital Markets and Broker & Index Relations at Vanguard, wrote in January 2024.

Stock investors own shares of companies that produce goods or services, and many investors receive dividends; Bond investors receive regular interest payments; and commodities are real assets that meet consumption needs, Jackson wrote.

“Despite being classified as a commodity, crypto is an immature asset class with little history, no inherent economic value, no cash flow, and can wreak havoc within a portfolio,” wrote Jackson, now a senior executive in the company’s Financial Advisor Services unit.

According to financial advisors, the entire crypto allocation ultimately depends on an investor’s risk tolerance and ability to take risks.

“Younger, more aggressive investors may be putting more (crypto) into their portfolios,” said Douglas Boneparth, a New York-based CFP and member of CNBC’s Advisor Council.

Investors generally hold about 5% of their classic 80/20 or 60/40 portfolio in crypto, said Boneparth, president and founder of Bone Fide Wealth.

“I think it might be a good idea to have some exposure to Bitcoin in your portfolio, but it’s not for everyone and will remain volatile,” Boneparth said. “As for other cryptocurrencies, it is difficult to say which ones will be a good long-term investment. But that doesn’t mean there won’t be winners.”

Investors looking to buy into cryptocurrencies should consider using a dollar-cost averaging strategy, said Johnson of Delancey Wealth Management.

“I buy 1% at a time until I reach my target risk,” Johnson said. “And that way I don’t put in 3%, 4%, 5% all at once and then something happens where it drops off precipitously.”

Investors interested in cryptocurrencies would also be wise to purchase and hold them for the long term, as they would other financial assets, Johnson said.

Morningstar suggests holding the cryptocurrency for at least 10 years, Arnott wrote.