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Maximizing Portfolio Potential: Digital Assets and Modern Portfolio Theory

In recent years, cryptocurrencies and digital assets emerged as an exciting and rapidly evolving investment class. With their potential for high returns, diversification benefits, and technological innovation, these digital assets captured the attention of investors worldwide. As a financial advisor, understanding how cryptocurrencies factor into Modern Portfolio Theory (MPT) is essential for providing comprehensive and forward-thinking investment advice to your clients.

The expanding investment landscape

MPT has previously focused on traditional asset classes like stocks, bonds, and cash. However, the rise of crypto and digital assets has broadened the investment landscape. And the unique characteristics of the digital market, like decentralization and potential fast returns, make it necessary for advisors to adapt their investment strategies.

Exploring the potential benefits 

As cryptocurrencies and digital assets become more prevalent as investing vehicles, many institutions are beginning to suggest anywhere from a 1-5% allocation of these assets in the modern portfolio. Here are a few reasons why:

  1. Diversification: Cryptocurrencies have historically had a low correlation with traditional asset classes, making them an effective diversification tool. Including cryptocurrencies in a portfolio has the potential to reduce overall portfolio risk.
  1. Growth Potential: Cryptocurrencies have witnessed significant growth in recent years. While the volatility remains a concern, their potential for high returns can be attractive to investors seeking growth opportunities.
  1. Technological Innovation: Blockchain technology, the underlying technology behind crypto and tokenized assets, holds immense transformative potential. It’s changing the financial landscape as we know it to make it more accessible and fruitful for investors.

What you need to know to get started

To incorporate cryptocurrencies and digital assets into client portfolios effectively, financial advisors should consider the following strategies:

  1. Communicate with your client. Be prepared to discuss and educate on digital assets with clients when deciding to allocate funds, as well as explain the risks and opportunities associated with this asset class. This will help to set realistic expectations to ensure informed decision-making.
  1. Define your client’s risk appetite. Assess your client’s risk tolerance and investment horizon to determine the appropriate allocation to cryptocurrencies and digital assets. Higher-risk profiles may warrant a larger allocation, while more conservative profiles may require a more limited exposure.
  1. Leverage well-researched strategies. Due diligence and research are crucial to any investment strategy. There’s a lot to know about digital assets, and with a small allocation in the midst of a broader, mixed portfolio strategy, it can be hard to get the full picture. Try leveraging crypto models or tokenized investment vehicles from trusted, leading institutions that have innovative research teams keeping up with the market (for example, our Marketplace partners with top firms like Securitize, WisdomTree, CoinDesk, Coinbase, and more).

You’re ready. Now what? 

Not sure where to get started? Onramp makes investing in digital assets fast and secure through all-in-one, easy-to-use tools that integrate into your existing tech stack. Our platform let’s you manage and bill on digital assets. And with automatic rebalancing and access to strategies from leading asset managers in the digital asset space, we let you spend less time on the minutae and more time with your clients.

You’re ready, and we’re here to help.