What’s the perfect amount to invest in cryptocurrencies? Financial advisors weigh in

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When it comes to investing in the new and highly volatile asset class of cryptocurrencies, most financial advisors have at least one piece of wisdom: Don’t put in more than you can afford to lose.

But while that rule of thumb is helpful, it’s pretty general. And so advisors are increasingly trying to find a more nuanced way of establishing how much, if any, of their clients’ money should be in bitcoin and the other digital tokens making headlines — and massive wealth for some.

Anjali Jariwala, a certified financial planner, CPA and founder of FIT Advisors in Torrance, California, said she doesn’t recommend any clients invest in cryptocurrencies until “they have their house in order.”

For her, that means they have a solid emergency savings account to turn to, are salting away a healthy amount for their retirement and are on track for any other goals, such as sending a child to college or buying a house.

If a client has checked all these boxes, Jariwala said, investing in cryptocurrencies may be an option for them.

But how much of their money should go in their direction?

To come up with a number, she said she borrows from the standard rule of how much money one should put into a particular stock: No more than 3% of their portfolio. Other advisors set their percentage at 2%, she said, and, “5% is the highest I’ve heard from an advisor perspective.”

Just another aspect of investing in cryptocurrencies that is unusual is how rebalancing works, Jariwala said.

For example, if an advisor decides that a client’s portfolio shouldn’t contain more than 30% stocks, they’ll need to sell equities if there’s a huge run-up in the market to keep their stock percentage below that threshold.

Yet recently, Jariwala had a client whose cryptocurrency exposure surged to 6% from 3%. She didn’t recommend selling.

“I’m OK with them keeping that investment because I don’t like when people are in and out of an investment too quickly,” she said. “It’s hard to apply my normal rules of thumb for rebalancing.”

Alex Doll, a CFP and president of Anfield Wealth Management in Cleveland, Ohio, has his own formula. He recommends clients don’t invest more than 10% of their “risky” assets in cryptocurrencies.

So let’s say someone has 70% of their money in equities and other more volatile investments, and 30% are in bonds and other forms of fixed income. They could put up to 7% of their money in cryptocurrencies. (He’s found clients often like to spread their allocation across different digital tokens, he said, most commonly ethereum and bitcoin.)

Some people should probably stay clear of cryptocurrencies altogether, Doll said. That includes people who don’t have money they can afford to lose and retirees who are living off their portfolio.

At the same time, there may be some people who can invest more heavily in the tokens, he said. Though those situations are limited.

“The only time I think it’s OK for someone to invest a larger amount than I’d recommend would be if they are young and have many years of a good income stream from a stable job, and truly understand the crypto world,” Doll said. “In this situation, if they were to lose more than they expected, at least they have the time and ongoing income stream to make up the lost savings.”

It’s not just about numbers, though, he said. Doll also tries to gauge how his clients will emotionally react to such volatile investing.

“I start by looking at the max amount I would recommend they invest given their overall portfolio, and ask them if they are comfortable losing, say, 50% of that in exchange for potentially doubling or tripling that amount,” Doll said.

“You do not want to be in a situation where you’re losing sleep.”

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