Here's Why You Shouldn't Put More Than 5% of Your Portfolio in Any One Crypto

Many financial advisors will tell you that cryptocurrencies don't belong in the average investor's portfolio because they're too volatile. Even those advisors who are more bullish on cryptocurrencies will usually tell you to allocate less than 5% of your portfolio to those tokens.

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Why shouldn't you invest more than 5% in cryptocurrencies?

Bitcoin (CRYPTO: BTC), the world's most valuable cryptocurrency, rallied 17,280% over the past decade, while the S&P 500 rose just 234%. But to achieve that gain, Bitcoin's investors would have needed to "hold on for dear life" (HODL) through some stomach-churning drops -- including 70%-80% peak-to-trough declines during the crashes of 2017-2018 and 2021-2022.

Ethereum (CRYPTO: ETH), the world's second-most-valuable cryptocurrency, plummeted by more than 90% during the 2017-2018 crash and shed about 80% of its value in 2021-2022. Yet if you had held Ethereum over the past ten years, you would be sitting on a 28,760% gain.

If you had invested more than 5% of your portfolio in those cryptocurrencies, you'd likely have been shaken out by one of those steep drawdowns. But if it were only a tiny sliver of your entire portfolio, you'd likely have left it alone and let it generate multibagger returns on its own. Therefore, if you're interested in cryptocurrencies, you should only allocate the money you can afford to lose to those tokens. You should also diversify those crypto holdings across multiple tokens.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.