Crypto portfolio diversification works only with limits, advisors say

Crypto portfolio diversification has become the main reason many investors say they own digital assets, according to a new Urban Institute report. For everyday investors, the point is practical: crypto can move differently from stocks and bonds, but it can also add sharp swings if the position gets too large.

The Urban Institute, a think tank, found that 45% of crypto investors named diversification as their primary reason for holding the asset. That made it the top motivation in a January survey of 3,194 U.S. adults.

Other reasons ranked lower. Urban said 27% of investors said they believe crypto is the future, 11% said they expected to make more money in crypto than in other investments, and 5% cited distrust of the U.S. dollar. The report counted owners of assets including bitcoin, solana, ethereum, XRP, stablecoins, memecoins and other digital coins.

Can crypto diversify a portfolio?

Diversification means spreading money across investments that do not all rise and fall together. The goal is to reduce the chance that one bad stretch in a single asset class, such as stocks, drives the whole portfolio down at once.

Veronica Willis, a senior investment strategist on Wells Fargo Investment Institute’s asset allocation team, said investors can diversify across asset classes, such as stocks, bonds, cash, commodities and crypto, or within one asset class, such as U.S. and international stocks.

Correlation is the number investors use to measure how closely two assets move together. A correlation of 1 means two assets move in lockstep, zero means no relationship, and a negative number means they tend to move in opposite directions.

Willis said bonds had a 0.02 correlation to the S&P 500 over the past 10 years, while digital assets had a 0.2 correlation to the index over the same period. That makes crypto less independent than bonds, but still low by that measure, according to Willis.

Jim Ferraioli, director of crypto research and strategy at the Schwab Center for Financial Research, said cryptocurrency can complement traditional holdings over long periods because it tends to act as a diversifier. Douglas Boneparth, a certified financial planner and founder of Bone Fide Wealth in New York, said bitcoin can justify a place in a portfolio when investors are using it for diversification.

Where the risk shows up

Advisors also warned that crypto’s diversification value is not guaranteed in every market. Boneparth said bitcoin and stocks can become more closely linked during periods of market stress, when investors sell liquid assets broadly.

Willis described crypto as a mix of a diversifying asset and a growth asset. Growth assets are investments with higher return potential and higher risk. In broad sell-offs, she said, crypto can be treated by investors like other risky assets.

Morningstar portfolio strategist Amy Arnott wrote in May 2025 that correlations can change. Arnott said bitcoin and other major cryptocurrencies had correlations below 0.4 with stocks, bonds, real estate, gold, commodities and other asset types over the 10 years through April 30, 2025. But she said bitcoin’s correlation with U.S. stocks rose to 0.55 for the three-year period ending in April 2025.

How much crypto should be in a portfolio?

Allocation is the key detail, according to advisors cited in the report. Many financial advisors point to a 1% to 2% crypto allocation as a reasonable range.

Boneparth said that once bitcoin rises above 5% of a portfolio, its volatility can start to drive the portfolio’s overall risk instead of diversifying it. Willis said she recommends about 2% to 3% for crypto, mainly for investors with growth as a goal rather than conservative investors seeking income.

For retail investors, the takeaway is that crypto can play a role in portfolio construction, according to the advisors, but it should not be treated as a full substitute for bonds, cash or other diversifiers. The same feature that makes crypto distinct from traditional markets can also make it volatile.

This story draws on original reporting from CNBC.