For cryptocurrency investors, volatility is a familiar challenge, and the year 2025 has proven to be particularly tumultuous. Bitcoin surged past $125,000 in October, only to experience significant declines, with a drop exceeding $40,000 from its peak value. Zach Pandl, head of research at Grayscale Investments, noted that the inherent volatility of crypto assets is unavoidable. “Crypto operates as an alternative asset class, and we pursue its unique return characteristics,” he remarked.
Currently, Bitcoin is trading around $88,000, and regardless of whether the price will rise or fall next, investors in the cryptocurrency market must be prepared to handle this volatility. Fortunately, there are strategies—ranging from innovative market approaches to traditional diversification techniques—that may help mitigate some of the risks associated with crypto investments.
Assess Your Portfolio’s Crypto Allocation
The first consideration for investors is to evaluate their cryptocurrency allocation within their overall portfolio. Some financial advisors are suggesting that investors can safely allocate up to 40% of their portfolios to crypto. However, for the majority, a more conservative approach is advisable, limiting crypto to a small percentage of a diversified portfolio. Individual circumstances, such as age, income, and risk tolerance, will influence this allocation, but a common guideline is to keep crypto exposure to around 5%. Many investors even choose to allocate between 1% and 3% of their portfolios to cryptocurrencies.
Manage Risk in Other Investments
David Siemer, co-founder and CEO of Wave Digital Assets, highlights the necessity of aligning the remainder of an investor’s portfolio to manage overall volatility. This could involve reducing exposure to high-growth stocks across the broader portfolio. “Given that crypto can either propel your returns or lead to significant losses, it is prudent to favor value stocks or bonds,” he advised.
Diversify Within the Crypto Sphere
While Bitcoin retains its status as the foremost digital asset by market cap, there are numerous other cryptocurrencies with significant use cases, according to Pandl. Incorporating assets like Ethereum and Solana into a crypto portfolio can allow investors to capture various market trends, potentially enhancing risk-adjusted returns. However, it is crucial for investors to understand that many alternative cryptocurrencies are closely linked to Bitcoin’s performance, which limits the effectiveness of diversification within the crypto market itself. Advisors like Nate Geraci caution that many emerging digital assets behave more like tech stocks than traditional stores of value, making it challenging to predict their future trading patterns, especially for assets like Ethereum.
Explore a Variety of ETFs or Index-Based Funds
The landscape for cryptocurrency exchange-traded funds (ETFs) has expanded dramatically since the approval of 11 spot Bitcoin ETFs by the Securities and Exchange Commission in January 2024. Bitcoin and Ethereum ETFs have attracted billions in institutional investments, while asset managers are vying to launch additional ETFs for Solana, XRP, Litecoin, and Cardano, among others. As the market continues to grow, investors can anticipate a wider array of ETFs that will enhance their diversification options. A notable example is the Grayscale CoinDesk Crypto 5 ETF, which offers exposure to the top five cryptocurrencies based on market capitalization.
Engage with a Crypto-Savvy Financial Advisor
Collaborating with a financial advisor who is knowledgeable about cryptocurrencies can be a valuable step toward creating a diversified portfolio that includes crypto. While not all advisors are currently incorporating digital assets into their models, this trend is shifting as cryptocurrencies gain popularity. For instance, Thryve Wealth Management utilizes Bitcoin as a hedge against the declining purchasing power of the U.S. dollar, a strategy that could be increasingly relevant if inflation persists. Advisors like Ric Edelman note that as traditional asset allocation models evolve, the role of crypto is becoming more pronounced in retirement planning.
Implement Dollar-Cost Averaging and Regular Rebalancing
Another strategy to mitigate the inherent volatility of cryptocurrency investments is dollar-cost averaging, which entails making consistent purchases of crypto at regular intervals. This approach helps to average out the purchase price, reducing the impact of price fluctuations over time, as explained by Steve Larsen, president of Columbia Advisory Group. Regular rebalancing is also critical; for example, if an investor’s Bitcoin allocation rises to 7% due to market gains, they should consider selling a portion to maintain their target allocation. Automated tools provided by many brokerages can facilitate this process, though many self-directed investors often overlook the importance of rebalancing.
Consider Downside Protection Investment Products
For those interested in cryptocurrencies but wary of potential losses, principal protected notes may offer a solution. These financial instruments guarantee the return of the principal amount at maturity, independent of the underlying asset’s price movements. Companies like Calamos Investments have introduced ETFs designed with downside protection, providing various levels of security against losses. While management fees for such ETFs can vary, investors appreciate the simplicity of investing in structured products managed by professionals.
