Charles Schwab Says Even Small Crypto Stakes Can Raise Portfolio Risk
- Charles Schwab said there is no single correct answer to crypto allocation, and that even a small allocation can increase portfolio risk.
- The report said crypto allocation weights should vary by portfolio type under return-based and risk-based approaches, citing the high volatility and drawdowns of Bitcoin and Ethereum.
- Charles Schwab said crypto can provide some diversification benefits, but stressed that portfolio performance can become heavily dependent on crypto prices as allocations increase.
Forecast Trend Report by Period
Charles Schwab said there is no single answer for how much investors should allocate to cryptocurrencies, and that even a small position can increase portfolio risk.
The Block reported on June 7 that Schwab, in a recent report, laid out two approaches to crypto investing — return-based and risk-based — and said investors should tailor their strategy to their goals and risk tolerance.
Schwab said adding crypto creates a greater concentration of risk than traditional stock-and-bond portfolios. Jim Frawley, head of digital asset research at the Schwab Center for Financial Research, wrote that adding crypto to a portfolio can sharply increase performance volatility even when the allocation is small.
The return-based approach sets allocations according to expected returns, volatility and correlations with other assets. Assuming Bitcoin posts an annual return of 15%, the report said conservative portfolios could allocate about 1%, neutral portfolios 6.6% and aggressive portfolios as much as 8.8%. Because Ethereum is more volatile, the report put appropriate allocations lower at 0.1%, 2% and 2.5%, respectively. It added that if expected returns fall below 10%, even aggressive investors may have less reason to hold crypto.
Schwab said Bitcoin has annual volatility of about 72% and a maximum drawdown of more than 70%. For Ethereum, annual volatility is about 98% and the drawdown is roughly 88%, far above traditional assets.
The risk-based approach sets crypto exposure based on the share of total portfolio risk attributable to the asset class. If crypto is set at 10% of total portfolio risk, a conservative portfolio could reach that threshold with an allocation of about 1.2% to Bitcoin or 0.9% to Ethereum, according to the report. In neutral and aggressive portfolios, similar risk contributions would come from Bitcoin allocations of about 2.8% to 4% and Ethereum allocations of about 2% to 2.9%.
Schwab said crypto can offer some diversification benefits, but added that portfolio performance can become heavily dependent on crypto prices as allocations increase.
Separately, Schwab is preparing to launch Schwab Crypto accounts that would allow direct trading in Bitcoin and Ethereum, and is operating a waitlist. The move marks a gradual shift from the firm’s 2019 stance that cryptocurrencies were speculative assets.
