Even small crypto allocations can materially increase portfolio risk, according to new research from Charles Schwab. The finding underscores how volatility in digital assets can quickly dominate overall performance.
The $12 trillion asset manager outlined two primary approaches to crypto investing in a report published Monday. The return-based method focuses on expected returns and correlations, while the risk-based approach measures how much total portfolio risk is driven by crypto exposure. Schwab said both frameworks can be used together depending on investor objectives.
How Much Crypto Risk Is Too Much For Portfolios?
Under return-based assumptions, bitcoin allocations vary widely depending on expected performance. If annual returns are projected at 15%, allocations could reach 6.6% in moderate portfolios and 8.8% in aggressive ones. Ether allocations are typically lower due to higher volatility, ranging from 0.1% in conservative portfolios to 2.5% in aggressive ones.
By comparison, bitcoin has exhibited annualized volatility of around 72% with drawdowns exceeding 70%, while ether has approached 98% volatility and nearly 88% drawdowns. These figures significantly exceed those of traditional assets such as equities and bonds, reinforcing Schwab’s emphasis on risk concentration.
“Investors need to be cognizant that, regardless of the approach they take, adding cryptocurrency to a portfolio brings a larger concentration of risk relative to traditional assets,” said Jim Ferraioli, director of digital currencies research at Schwab.
He added that even modest allocations can make portfolio performance increasingly dependent on crypto movements.
The risk-based framework offers a different lens by targeting how much overall portfolio risk comes from crypto. In this model, a 1.2% bitcoin allocation in a conservative portfolio can represent 10% of total risk, while moderate and aggressive portfolios may allocate up to 4% to reach similar thresholds.
Still, Schwab noted that cryptocurrencies may provide diversification benefits within a broader portfolio of stocks, bonds, and cash. The report comes as the firm prepares to launch “Schwab Crypto,” allowing direct trading of bitcoin and ether, marking a shift from its earlier stance that labeled crypto as purely speculative.
The next catalyst will be how clients respond to direct crypto access and whether allocation strategies shift as volatility and institutional adoption evolve.
