Crypto’s Share in an Investment Portfolio: Realism vs. Optimal Allocation

Key takeaways:

• Institutional data supports including crypto in a portfolio, but at a modest weight
• A realistic current allocation is 1–5%, while the mathematical optimum often falls in the 2–6% range
• Crypto’s diversification benefit can improve risk-adjusted returns, but only with disciplined rebalancing
• The biggest risk is no longer owning crypto, but also the risk of a zero allocation

Introduction: How much crypto should you hold?

Cryptocurrencies, especially Bitcoin and other major assets, have become significant digital asset classes in recent years. Investors are increasingly considering how crypto should be allocated within a diversified portfolio: how much, why, and using what strategy?

This question is no longer just a speculative trend. More and more institutional players are evaluating crypto’s role through the lens of rational investment analysis. For example, firms like Morgan Stanley and BlackRock are already building model portfolios where crypto is a small but deliberate part of the overall mix. Data from wealth managers reveals an interesting gap between what investors are doing in practice (realism) and what would be mathematically most efficient (optimal allocation).

For most investors, research suggests the “optimal” crypto share is roughly 2–6% of a diversified portfolio: this level improves risk-adjusted returns while keeping overall risk under control.

In this article, we dive into recent research. We examine the role of cryptocurrencies in a diversified portfolio from two angles: what is actually happening in the market, and what the numbers say about risk-adjusted returns.

What is the role of cryptocurrencies in a portfolio?

Cryptocurrencies have captured investors’ imagination worldwide, offering the possibility of exceptionally high returns, alongside equally exceptional volatility. The crypto market’s total value has risen to as much as roughly $4 trillion, and it has also gained traction in political debate in Washington. At the same time, crypto has become widely accessible to investors through crypto-based exchange-traded products (ETPs).

Before we look at allocation questions in multi-asset portfolios, we need to determine where cryptocurrencies fit in an asset-class taxonomy. Based on their characteristics, Morgan Stanley’s Global Investment Committee has classified cryptocurrencies as real assets or alternative investments alongside commodities, energy infrastructure, and real estate investment trusts (REITs).

As with gold, their value is often influenced by broad economic factors such as inflation expectations or shifts in monetary policy, as well as market-technical factors like changes in supply and demand. Unlike equities or fixed income, crypto does not generate cash flow in the form of dividends or interest. Instead, its value is driven by supply-and-demand dynamics and macroeconomic factors such as interest rates and liquidity.

Views on crypto’s place in a portfolio vary. Investors have typically framed cryptocurrencies in three ways.

• “Digital gold”: Some investors see Bitcoin (the largest cryptocurrency by market cap) as a kind of “digital gold,” due to its limited supply and potential inflation-hedging properties.
• Disruptive technology: Ether (the second-largest crypto by market cap) is often compared to a technology stock and viewed as technology and infrastructure that enables new digital applications and financial solutions (e.g., smart contract platforms).
• Diversification benefit (diversifier): Some investors look at crypto as a portfolio diversifier based on historical returns, volatility, and correlations.

The central challenge with crypto is its exceptionally high price volatility. According to Morgan Stanley’s analysis, annual volatility for cryptocurrencies has been around 55%, roughly four times that of the S&P 500. Historically, the crypto market has seen declines of as much as 70% within a single year, making it an investment that requires a strong risk tolerance.

The current landscape and realism: Crypto as part of a modern portfolio

By 2025, cryptocurrencies have cemented their place as an “alternative investment” alongside equities and fixed income. Recent outlooks from major asset managers such as Morgan Stanley and State Street show that institutional money has begun moving from cautious observation toward tangible positions.

The “zero-allocation” risk

The most significant shift in mindset is moving from avoiding risk to understanding it. Previously, the risk was seen solely as owning crypto. Now, wealth managers also talk about “zero-allocation risk.” Because digital assets have historically offered low correlation to traditional markets, leaving them out of a portfolio entirely can weaken long-term return potential relative to peers.

What is a realistic current level?

Despite the eye-catching headlines, the reality is more measured. Surveys show that the majority of large investors plan to increase their exposure to digital assets: in State Street’s 2025 global study, more than 50% of institutional investors still kept their crypto weight below 1%, but 60% of respondents planned to raise the share of their crypto investments above 2% over the next year.

EY’s institutional study shows that 38% of institutions that hold crypto are in the 1–5% range, while 24% of family offices exceed a 5% allocation. The average weighting among professional investors remains below 1%, underscoring the caution among large players.

Where is the trend heading?

A large share of institutions either are allocating or plan to allocate to digital asset classes; more than half say they intend to increase the weighting over the coming years, and around 59% are targeting an allocation above 5%. Based on this, “realism” today is still below 5%, but the expected reality over a 3–7 year horizon is mid single-digit percentages across a broad professional investor base.

Conservative recommendations from wealth managers

The table presents the Morgan Stanley Global Investment Committee (GIC) recommendations for the maximum initial allocation to cryptocurrencies in multi-asset investment portfolios. The recommendations vary by investor risk profile: for low-risk portfolios, no allocation to cryptocurrencies is recommended, while the permitted maximum weight increases gradually in higher-risk portfolios. The goal of the table is to illustrate how cryptocurrencies are viewed as a complementary, high-risk investment whose share in a portfolio should be sized according to the investor’s risk tolerance and the portfolio’s overall objectives.

Recommendations for the maximum initial allocation to cryptocurrencies in multi-asset investment portfolios

Source: Morgan Stanley Wealth Management GIO

GIC recommends keeping the crypto weight in a portfolio relatively small and increasing it only as an investor’s risk tolerance rises. In addition, regular portfolio rebalancing is seen as a key tool for managing overall crypto-related risk and preventing an outsized impact on the portfolio’s risk level.

BlackRock, the world’s largest asset manager, recommends an even more conservative approach. In BlackRock’s view, a Bitcoin allocation of around 1–2% of a portfolio can be an effective way to add diversification to returns without pushing overall portfolio risk too high relative to traditional risk exposures. This is based on the idea that Bitcoin’s risk-adjusted impact is comparable to concentrated single-stock exposures, such as the effect of large technology stocks on portfolio risk.

BlackRock also emphasizes that crypto remains a high-risk asset class whose role may change as adoption levels and the regulatory environment evolve. Accordingly, BlackRock’s practical recommendation to investors is modest exposure that recognizes the potential for returns without excessively jeopardizing overall portfolio stability. It is also realistic to acknowledge that digital assets require more active portfolio management. The 2025 market outlooks highlight that simply “buy and forget” may not work in the same way as with index funds, due to the cyclical nature of the asset class.

The theoretical optimal allocation: What does the data say?

If we move from caution to pure mathematics, the numbers tell a slightly bolder story. Investment research often uses the Sharpe ratio to measure portfolio efficiency: how much return is achieved relative to the risk taken.

An analysis by the asset manager VanEck showed that the risk-adjusted return of a traditional 60/40 portfolio (equities/bonds) improved consistently when the crypto allocation was increased to 6%. In their model, this was split evenly into 3% Bitcoin and 3% Ether. According to the study, this allocation significantly improved the portfolio’s Sharpe ratio without an unreasonable increase in maximum drawdown. The analysis shows how a strategic crypto weighting can enhance portfolio performance and represents a meaningful development in allocation strategies.

Why such a high number?

• Diversification benefit: Even though crypto is volatile, it does not always move in lockstep with the S&P 500 or government bonds.
• Return potential: Historically, crypto bull markets have been so strong that they have lifted overall portfolio returns even when the rest of the market has been sluggish.

Hashdex’s analysis also supports this, but more moderately. In their view, 2–2.5% is the “sweet spot” that improves the Sharpe ratio clearly without significantly increasing portfolio volatility.

So the mathematical optimum is materially higher than today’s realistic allocations. Why? Because the math assumes the investor behaves like a robot: buying more when prices collapse and selling when they rise.

The downside of theory: Tolerance for volatility and the impact on the investment portfolio

It is important to understand the difference between a mathematical optimum and a psychological optimum. Even if a 6% allocation looks best in Excel, in practice it means a sharp increase in portfolio volatility.

According to research, a 6% crypto weight in a growth-oriented portfolio nearly doubled the portfolio’s volatility. In some scenarios, the value of the crypto holding rose quickly and exceeded its target weight, making the portfolio even more vulnerable to losses during steep market declines.

This underscores the importance of disciplined portfolio rebalancing to keep the crypto allocation within the intended range. If the target is, for example, 4%, and prices surge, the investor needs to sell holdings to return to the target weight. Without disciplined rebalancing, an “optimal” portfolio quickly turns into an uncontrolled concentration of risk.

Summary: How to build a sustainable strategy?

At the end of 2025, we are in a situation where data supports including cryptocurrencies in an investment portfolio, but the sizing requires careful judgment.

• Conservative approach (1–2%): Suitable for an investor who wants to hedge against “zero-allocation risk” and understands the technology’s potential, but wants to minimize volatility. This aligns with the recommendations of major asset managers.
• Growth-seeking/Optimal approach (3–6%): Based on historical data on maximizing risk-adjusted returns. It requires strong stomach and disciplined portfolio rebalancing at regular intervals.

Whatever you choose, the key is to understand that crypto allocation is no longer a binary “yes/no” decision, but a question of proper sizing relative to your own goals.

This article is based on 2025 market outlooks and research data from, among others, Morgan Stanley, State Street, EY, Blackrock, Hashdex and VanEck.