Crypto as part of a diversified portfolio

Diversification and portfolio theory

As crypto matures, its role as a strategic diversifier is gaining traction. While it’s not a replacement for traditional assets, the new asset class is increasingly being seen as a complementary portfolio component given its unique characteristics.

Only a few short years ago, cryptocurrency was considered to be a speculative novelty. In 2025, the alternative asset class has gone from a fringe digital experiment to a massive new market — with trailblazers Bitcoin and Ethereum starting to gain legitimacy through growing decentralised finance, continually developing regulatory frameworks and institutional investment.

However, it is worth noting that cryptocurrency in the UK is not yet fully regulated.

With US equities, gold, bonds and now Bitcoin at recent highs, it’s understandable that more and more investors are starting to ask whether crypto should also be part of their diversified investment portfolio.

Of course, diversification is one the central tenets of investing in general — the idea being that investors can reduce their overall risk by spreading capital across various asset classes that respond differently to market conditions. The concept was first coined by Harry Markowitz in his work ‘Modern Portfolio Theory,’ where he speculated that by mixing asset classes with uncorrelated returns, investors could achieve an optimal balance of risk and reward.

Traditionally, this meant a combination of equities, bonds, cash, real estate and commodities like gold — and crypto is perhaps now ready to be added to the list. Unlike traditional assets, crypto is not as tied to conventional metrics like earnings, interest rates or GDP growth.

Instead, crypto prices are more influenced by factors including network adoption, regulatory news and technological breakthroughs. This means that crypto sports differentiated risk drivers that don’t typically align with other asset classes, therefore making the new asset class a source of further diversification.

However, in recent years, the larger cryptocurrencies have to some extent shown some correlation with blue chip US tech stocks — though it remains to be seen whether this continues.

How to invest in crypto with us

1. Open an account online or download our IG Invest app. From there, you’ll be able to access the cryptocurrency market through our platform. 
2. Learn more about how the cryptocurrency market works and choose a coin to research.  
3. Build a trading plan that aligns with your personality and risk appetite. 
4. Search for your desired coin on our web platform or app. 
5. Choose your position size, then open and monitor your investment.

Remember that past performance is not an indicator of future returns, that the value of investments can fall as well as rise and that you could get back less than your original investment.

If you want to test out your strategy first without risking real capital, consider our demo account where you can practice your cryptocurrency trading tactics with virtual funds.

Risk-return profile of crypto

Cryptocurrency sports a unique risk-return profile. Unlike the predictable yields of bonds, or the capital gains and dividends of stocks, cryptocurrencies are driven by a combination of market sentiment and mass adoption. As there are no standard metrics to analyse, they tend to display extreme price movements in very short periods of time.

For example, Bitcoin — by far the largest crypto on the market — rose from less than $1 when it was created in 2009 to as much as $105,000 in Q2 2025. Ethereum, the second largest coin, has also appreciated significantly, though both coins lost more than 70% of their respective values in the 2022 bear market, while smaller altcoins lost as much as 90%. Even in a strong market, price swings of 10% in a single day are relatively common.

This data has been sourced from coinmarketcap.com. Please note that all figures refer to the past and that past performance is not a reliable indicator of future results. It's also worth noting that all figures are in USD (US Dollars), results may be different in other currencies. The return may increase or decrease as a result of currency fluctuation.

Despite this extreme volatility, the asymmetric return potential of crypto can appeal to long-term investors. The possibility of substantial upside, with only a relatively small allocation, makes it attractive to many investors from a risk-reward perspective. Even a modest 1–2% allocation may be capable of having a material impact on portfolio performance if the crypto component outperforms.

Naturally, this also introduces downside risk, so would-be investors need to be emotionally and financially prepared to withstand substantial drawdowns, potentially for long periods. This is particularly important for older investors who may not have the time horizon to wait out any protracted bear market.

Traditional markets correlation

Perhaps the most hotly debated diversification aspect of crypto is how it moves relative to other assets. The economic principle remains that assets that are uncorrelated or negatively correlated improve diversification because they perform differently to each other — and when crypto was getting started, initially it moved independent of equities and bonds — making larger coins like Bitcoin excellent diversifiers.

However, as crypto has integrated into the global markets amid increased adoption, it’s arguably becoming more correlated with traditional assets, especially during downturns.

For example, during the pandemic market crash in March 2020, cryptocurrencies sold off in tandem with equities. Similarly, during the Federal Reserve’s interest rate hikes in 2022, crypto prices fell alongside high-growth technology stocks — raising the question of whether crypto is a speculative tech asset rather than ‘digital gold.’ On the other hand, 2025 has seen many of the largest coins rise to record highs in line with the gold price.

Overall, crypto does tend to show weaker correlation with equities than many traditional assets do with one another. But this ying and yang relationship remains everchanging.

Portfolio allocation

If you accept that crypto is a useful portfolio diversifier with reasonable upside, the next consideration is how much you should own. Of course, the answer is going to be different depending on your risk tolerance, time horizon and knowledge base — but a conservative investor might allocate as little as 1% of their total portfolio to crypto.

Moderate investors might go for somewhere in the range of 3% to 5%, while aggressive investors with high conviction in the asset class might consider allocations above this — though no more than 10% given the volatile nature of this asset class.

Would-be investors also need to consider how to diversify within their allocation. Bitcoin is the most widely held and established coin with some investors claiming it a form of ‘digital gold,’ though Ethereum, with its programmable blockchain and widespread use in decentralised applications, arguably offers larger exposure to a broader segment of the crypto economy. Other altcoins are potentially higher risk, higher reward — but for all coins, it’s always crucial to consider liquidity, security and custody arrangements.

Many new investors prefer to participate in the crypto market through ETFs or mutual funds, with some choosing to invest in crypto miners or even crypto treasury companies like Strategy.

Most importantly, you might want to reset your crypto allocations regularly, simply because crypto is so volatile that it can dominate your portfolio unintentionally.

Risks and regulation

As with all investments, crypto has its own set of unique risks, even beyond the volatility. Crypto’s largest risk may be regulatory uncertainty, with agencies like the United States’ Securities and Exchange Commission in the past launching enforcement actions against major players in the space, in many cases due to disagreements over whether certain tokens are securities or commodities.

Security is another key concern, mostly because the decentralised nature of crypto makes it susceptible to hacking and exploitation. Smart contract bugs, phishing scams and exchange hacks have resulted in billions of dollars in losses over the past decade. While security has improved, the space still requires a high level of technical literacy and caution, especially when engaging with decentralised finance platforms or managing private keys.

Then there’s the macro risks. The integration of crypto into financial markets is making it more vulnerable to broader economic cycles than in the past: changing interest rates, tighter liquidity or declining investor sentiment can all impact prices significantly. At the same time, the asset class has specific risks including the possibility for technological failures, loss of user trust or even government crackdowns.

Despite these risks, the long-term outlook for crypto arguably remains cautiously optimistic.

Institutional adoption continues to grow, with titanic firms like BlackRock and Fidelity offering crypto investment products. Governments are also now experimenting with central bank digital currencies, and venture capital funding also continues to pour cash into blockchain startups.

And as infrastructure improves and regulation matures, certain crypto projects may even transition from speculative to core components of digital era investing.

Crypto diversification summed up 

• Crypto diversification benefits include unique risk drivers and historically low correlation to traditional assets, which can help reduce overall portfolio volatility 
• Crypto as an asset class is arguably high risk high reward, with significant upside potential but also the possibility of steep drawdowns 
• Even small allocations of 1–2% can materially affect portfolio performance without overexposing investors to sector specific risk 
• The fast moving nature of crypto markets means active monitoring and regular rebalancing are essential to maintain intended risk levels