Charles Schwab’s latest research on digital assets argues that cryptocurrencies’ place in a portfolio depends less on return forecasts and more on how much risk an investor is willing to take.
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, pointing to strong historical swings in both assets. Bitcoin and ether have each suffered declines of more than 70% in previous cycles, far outpacing typical stock or bond declines.
Because of that volatility, even small allocations can have a huge effect. Schwab finds that just a low single-digit percentage in crypto can account for a significant portion of total portfolio risk. In some cases, allocations as small as 1% to 3% can materially change the behavior of a portfolio during market stress.
The report outlines two common approaches to adding exposure to cryptocurrencies. The first follows traditional portfolio theory, where allocations depend on expected returns, volatility, and correlations. But Schwab highlights a key weakness: Assumptions about cryptocurrency returns vary widely among investors.
“Our research suggests that cryptocurrencies may not offer a large enough risk-adjusted return to justify a significant allocation if return expectations are less than 10%, even for an aggressive investor,” the report states. This makes portfolio results very sensitive to subjective forecasts. A modest change in expected returns can result in large variations in the recommended allocation.
The second method focuses on risk budgeting. Instead of guessing at returns, investors decide how much total portfolio risk they want cryptocurrencies to contribute. This approach shifts the conversation from performance to tolerance. Still, Schwab warns 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 play a role.
The firm also emphasizes that cryptocurrencies remain a speculative investment. “Cryptocurrencies and cryptocurrency-related products are not suitable for everyone,” Schwab writes, citing risks including illiquidity, theft and fraud. It may offer diversification and potential for higher returns, but behaves more like a high-risk satellite holding than a core allocation, the report concluded.
