Charles Schwab’s latest research on digital assets argues that the place of cryptocurrencies in a portfolio depends less on return expectations and more on the level of risk an investor is willing to take.
The report frames bitcoin and ether (ETH) as high-volatility assets that can quickly reshape a portfolio’s risk profile. “Any allocation to cryptocurrencies is likely to increase the volatility of a portfolio,” Schwab writes, noting the strong historical fluctuations of both assets. Bitcoin and Ether have each suffered declines of more than 70% in previous cycles, far outpacing typical declines in stocks or bonds.
Because of this volatility, even small allocations can have an outsized effect. Schwab finds that only a low single-digit percentage in crypto can account for a significant portion of total portfolio risk. In some cases, allocations as low as 1% to 3% can significantly change the behavior of a portfolio during times of market stress.
The report describes two common approaches to adding crypto exposure. The first follows traditional portfolio theory, in which allocations depend on expected returns, volatility and correlations. But Schwab points out a major weakness: Assumptions about cryptocurrency returns vary widely among investors.
“Our research suggests that cryptocurrencies may not offer a large enough risk-adjusted return to warrant a meaningful allocation if return expectations are less than 10%, even for an aggressive investor,” the report said. This makes portfolio results very sensitive to subjective forecasts. A small change in expected returns can result in significant variations in the recommended allocation.
The second method focuses on risk budgeting. Instead of guessing returns, investors decide how much total portfolio risk they want crypto to contribute to. This approach shifts the conversation from performance to tolerance. Nonetheless, Schwab cautions that cryptocurrency volatility can exceed expectations, even within a defined risk budget.
“There is no ‘correct’ allocation to cryptocurrencies, and we believe the decision is largely personal,” the report notes. Factors such as investment horizon, familiarity with digital assets, and loss capacity all play a role.
The company also emphasizes that crypto remains a speculative investment. “Cryptocurrencies and crypto-related products are not suitable for everyone,” Schwab writes, citing risks such as illiquidity, theft and fraud. It may offer diversification and the potential for higher returns, but it behaves more like a high-risk satellite investment than a core allocation, the report concludes.
